Description
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Explanation & Answer
See the attached detailed solution. All the workings are shown. In case of anything else you can get back to me.Regards,Frank.
Solution:
Question a-1
Share price = $140,000 ÷ 7,000 = $20 per share
Equity value = $140,000
ROE = Net income (NI) ÷ Equity
RECESSION
EBIT
$22,400
Less interest
0
Less: Taxes
0
Net Income (NI)
$22,400
ROE = NI/Equity
0.16
ROE %
16%
Normal
$32,000
0
0
$32,000
0.2286
22.86%
Expansion
$35,840
0
0
$35,840
0.256
25.5%
Question a-2
Percentage changes in ROE when th...