Music City, Inc., has no debt outstanding and a total market value of $150,000. Earnings before interest and taxes, EBIT, are projected to be $32,000 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 will be 30 percent lower. The company is considering a $75,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 10,000 shares outstanding. Ignore taxes for this problem. Assume the stock price is constant. Required:
a. Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued.
b. Calculate the percentage changes in ROE when the economy expands or enters a recession. Assume the firm goes through with proposed recapitalization.
c. Calculate return on equity (ROE) under each of the three economic scenarios.
d. Calculate the percentage changes in ROE when the economy expands or enters a recession.

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Walsh company manufactures and sells one product. the following information pertains to each of the company’s first two years of operations: variable costs per unit: manufacturing: direct materials $ 25 direct labor $ 12 variable manufacturing overhead $ 5 variable selling and administrative $ 4 fixed costs per year: fixed manufacturing overhead $ 400,000 fixed selling and administrative expenses $ 60,000 during its first year of operations, walsh produced 50,000 units and sold 40,000 units. during its second year of operations, it produced 40,000 units and sold 50,000 units. the selling price of the company’s product is $83 per unit. required: 1. assume the company uses variable costing: a. compute the unit product cost for year 1 and year 2. b. prepare an income statement for year 1 and year 2. 2. assume the company uses absorption costing: a. compute the unit product cost for year 1 and year 2. b. prepare an income statement for year 1 and year 2. 3. reconcile the difference between variable costing and absorption costing net operating income in year 1.