A company has $20 billion of sales and $1 billion of net income. Its total assets are $10 billion. The company’s total assets equal total invested capital, and its capital consists of half debt and half common equity. The firm’s interest rate is 5%, and its tax rate is 40%. 1. What is its ROIC? 2. Would this firm’s ROA increase if it used less leverage? (The size of the firm does not change.)

A company has $20 billion of sales and $1 billion of net income. Its total assets are $10 billion. The company’s total assets equal total invested capital, and its capital consists of half debt and half common equity. The firm’s interest rate is 5%, and its tax rate is 40%. 1. What is its ROIC? 2. Would this firm’s ROA increase if it used less leverage? (The size of the firm does not change.)

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter9: The Cost Of Capital

Section: Chapter Questions

Problem 7P

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