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Castle, Inc., has no debt outstanding and a total market value of $240,000. Earnings before interest and taxes, EBIT, are projected to be $28,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 10 percent higher. If there is a recession, then EBIT wil be 25 percent lower. The firm is considering a debt issue of $48,000 with an interest rate of 4 percent. The proceeds will be used to repurchase shares of stock. There are currently 20,000 shares outstanding. Ignore taxes for questions a and b. Assume the stock price remains constant. a-1. Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 iate decimal places, e.g., 32.16.) Assume the firm has a tax rate of 35 percent. c-1. Calculate return on equity (ROE) under each of the three economic scenarios before any d ebt is ounded to 2 issued. (Do not round intermediate calculations. Enter your answers as a percent r decimal places, e.g., 32.16.) ROE Recession Normal Expansion c-2. Calculate the percentage changes in ROE when the economy expands or enters a recession. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations. nter your answers as a percent rounded to the nearest whole number, e.g., 32.) % change in ROE Recession Expansion c-3. Calculate the return on equity (ROE) under each of the three economic scenarios assuming the firm goes through with the recapitalization. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) 00 s n det ROE will b , the rers Recessiorn Normal Expansion c-4. Given the recapitalization, calculate the percentage changes in ROE when the economy expands or enters a recession. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g.. 32.16.) % change in ROE Recession Expansion Hints Referonces Worksheet Difficulty: 1 Basic Section: 14.3 Financial Leverage and Firm Value: An Example hploal

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