500,000 in equity. Precise Electronics Inc has no debt currently, but the board is considering a loan of $150,000 at 8% interest, which they will use to repurchase shares of their own stock at $50 per share. If there is a recession, EBIT could be only 75% of projected. If there is an expansion, EBIT might be 40% greater than projected. What will their return on equity be under the current structure and under the proposed structure for each scenario? Is the restructuring a good idea?
Current Structure:
Worst Case________Base Case________Best Case________.
Proposed Structure:
Worst Case________Base Case________Best Case ________.
Should they do the re-structuring?
A. Yes.
B. No
