Quigley Inc. is considering two financial plans for the coming year. Management expects sales to be $300,000,operating costs to be $265,000, assets (which is equal to its total invested capital) to be $200,000, and its taxrate to be 25%. Under Plan A it would finance the firm using 25% debt and 75% common equity. The interestrate on the debt would be 8.8%, but under a contract with existing bondholders the TIE ratio would have to bemaintained at or above 3.6. Under Plan B, the maximum debt that met the TIE constraint would be employed.Assuming that sales, operating costs, assets, total invested capital, the interest rate, and the tax rate would allremain constant, by how much would the ROE change in response to the change in the capital structure? Donot round your intermediate calculations.a. 7.92%O b. 7.36 %1O c. 8.00%O d. 7.84%O e. 7.76%

ROE is the return on equity and can be measured by the dividing net income by the equity and changes…

Answered: Quigley Inc. is considering two…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section: Chapter Questions

Problem 20P

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A financial manager is considering two possible sources of funds necessary to finance a $10,000,000 investment that will yield $1,500,000 before interest and taxes. Alternative one is a short-term commercial bank loan with an interest rate of 8 percent for one year. The alternative is a five-year term loan with an interest rate of 10 percent. The firm's income tax rate is 30 percent. What will be the firm’s projected earnings under each alternative for the first year? The financial manager expects short-term rates to rise to 11 percent in the second year. At that time long-term rates will have risen to 12%. What will be the firm’s projected earnings under each alternative in the second year? What are the crucial considerations when selecting between short- and long-term sources of finance?
A financial manager is considering two possible sources of funds necessary to finance a $10,000,000 investment that will yield $1,500,000 before interest and taxes. Alternative one is a short-term commercial bank loan with an interest rate of 8 percent for one year. The alternative is a five-year term loan with an interest rate of 10 percent. The firm's income tax rate is 30 percent. What will be the firm's projected earnings under each alternative for the first year?
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A financial manager is considering two possible sources of funds necessary to finance a $10,000,000 investment that will yield $1,500,000 before interest and taxes. Alternative one is a short-term commercial bank loan with an interest rate of 8 percent for one year. The alternative is a five-year term loan with an interest rate of 10 percent. The firm's income tax rate is 30 percent. What are the crucial considerations when selecting between short- and long-term sources of finance?
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