CSUSB, Inc., has no debt outstanding and a total market value of $250,000. Earnings before interest and taxes, EBIT, are projected to be $42,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 18 percent higher. If there is a recession, then EBIT will be 30 percent lower. The firm is considering a $100,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 10,000 shares outstanding.
What is EPS under each economic condition with and without the debt issue?
How much does EPS grow in an expansion with and without the debt issue?
What is the firm’s ROE under each economic condition with and without the debt issue?
Suppose the firm has a 35% tax rate, now what is the firm’s ROE under each economic condition with and without the debt issue?