Bundle: Contemporary Financial Management, 14th + MindTap Finance, 1 term (6 months) Printed Access Card
14th Edition
ISBN: 9781337587563
Author: MOYER, R. Charles; McGuigan, James R.; Rao, Ramesh P.
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Videos
Question
Chapter 13, Problem 8P
a)
Summary Introduction
To determine: The rate of
b)
Summary Introduction
To determine: The capital structure yield high ROE.
c)
Summary Introduction
To determine: The
d)
Summary Introduction
To determine: The capital structure yield high ROE.
e)
Summary Introduction
To determine: The rate of return on equity.
f)
Summary Introduction
To determine: The capital structure yield high ROE.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Jikoni Company has 2 sources of funds: long-
term debt with a market and book value of
$15M issued at an interest rate of 10%, and
equity capital that has a market value of $9
million (book value of $5 million). Jikoni
Company has profit centres in the following
locations with the following operating
incomes, total assets, and current liabilities.
The cost of equity capital is 15%, while the tax
rate is 30%.
Operating Assets
Income
Current
Liabilities
Smith Falls $815,000 $3,750,000 $800,000
Brocksville $1,100,000 $5,000,000$1,200,000
Stoneybrook$2,450,000$9,250,000 $3,180,000
What is the EVA for Smith Falls?
A)$305,000
B)$338,563
C)$220,188
D)$275,500
E)$255,500
Ohio Quarry Inc. has $20 million in assets. Its expected operating income (EBIT) is $4 million and its income tax rate is 40 percent. If Ohio Quarry finances 20 percent of its total assets with debt capital, the pretax cost of funds is 10 percent. If the company finances 40 percent of its total assets with debt capital, the pretax cost of funds is 15 percent. Round your answers to the questions below to two decimal places.
Determine the rate of return on equity (ROE) under the three different capital structures (0, 20, and 40% debt ratios).0% debt ratio: %
20% debt ratio: %
40% debt ratio: %
Which capital structure yields the highest expected ROE? yields the highest expected ROE.
Determine the ROE under each of the three capital structures (0, 20, and 40% debt ratios) if expected EBIT decreases by 40 percent.0% debt ratio: %
20% debt ratio: %
40% debt ratio: %
Which capital structure yields the highest ROE calculated in part c? yields the highest expected ROE.…
Ohio Quarry Inc. has $10 million in assets. Its expected operating income (EBIT) is $4 million and its income tax rate is 40 percent. If Ohio Quarry finances 20 percent of its total assets with debt capital, the pretax cost of funds is 13 percent. If the company finances 40 percent of its total assets with debt capital, the pretax cost of funds is 18 percent. Round your answers to the questions below to two decimal places.
Determine the rate of return on equity (ROE) under the three different capital structures (0, 20, and 40% debt ratios).0% debt ratio: %
20% debt ratio: %
40% debt ratio: %
Which capital structure yields the highest expected ROE?-Select-0 percent debt and 100 percent equity20 percent debt and 80 percent equity40 percent debt and 60 percent equityItem 4 yields the highest expected ROE.
Determine the ROE under each of the three capital structures (0, 20, and 40% debt ratios) if expected EBIT decreases by 30 percent.0% debt ratio: %
20% debt ratio: %…
Chapter 13 Solutions
Bundle: Contemporary Financial Management, 14th + MindTap Finance, 1 term (6 months) Printed Access Card
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- The Berndt Corporation expects to have sales of 12 million. Costs other than depreciation are expected to be 75% of sales, and depreciation is expected to be 1.5 million. All sales revenues will be collected in cash, and costs other than depreciation must be paid for during the year. Berndts federal-plus-state tax rate is 40%. Berndt has no debt. a. Set up an income statement. What is Berndts expected net income? Its expected net cash flow? b. Suppose Congress changed the tax laws so that Berndts depreciation expenses doubled. No changes in operations occurred. What would happen to reported profit and to net cash flow? c. Now suppose that Congress changed the tax laws such that, instead of doubling Berndts depreciation, it was reduced by 50%. How would profit and net cash flow be affected? d. If this were your company, would you prefer Congress to cause your depreciation expense to be doubled or halved? Why?arrow_forwardCompany A has a debt to equity ratio to one. Its cost of equity is 20% and its cost of debt is 10%. Assuming a tax rate of 50%. Company A's weighted average cost of capital is? (write the process of calculation.)arrow_forwardOhio Quarry Inc. has $10 million in assets. Its expected operating income (EBIT) is $4 million and its income tax rate is 40 percent. If Ohio Quarry finances 20 percent of its total assets with debt capital, the pretax cost of funds is 13 percent. If the company finances 40 percent of its total assets with debt capital, the pretax cost of funds is 18 percent. Round your answers to the questions below to two decimal places. Determine the percentage change in ROE under each of the three capital structures (that is, debt ratios) as the result of a 30 percent decline in EBIT. Use the minus sign to enter a negative percentage change in ROE if necessary.0% debt ratio: % 20% debt ratio: % 40% debt ratio: %arrow_forward
- Company X has debt and equity as sources of funds. Company X has market value of debtas $150,000 and book value of debt as $80,000. The company has book value of equity as$100,000 and market value of equity as $125,000. The cost of debt is 8.25% and cost ofequity is 9.57%. the tax rate is 38%. What is the Weighted Average Cost of Capital(WACC)?a. 7.59%b. 7.78%c. 7.14%d. 7.68%arrow_forwardCompany X has debt and equity as sources of funds. Company X has market value of debt as $150,000 and book value of debt as $80,000. The company has book value of equity as $100,000 and market value of equity as $125,000. The cost of debt is 8.25% and cost of equity is 9.57%. the tax rate is 38%. What is the Weighted Average Cost of Capital (WACC)? a. 7.59% b. 7.78% c. 7.14% d. 7.68%arrow_forwardOSA Company has the following values of interest-bearing debt and common equity capital: Financing Source Dollar Amount Interest Rate Cost of CapitalShort-term loan $200,000 12%Long-term loan $200,000 14%Equity capital $600,000 22% OSI is in the 30 percent average tax bracket. A. Calculate the after-tax weighted average cost of capital for OSI. B. Given that OSI's EBIT is $300,000, compute its EVA. C. Did the venture build or destroy value? Explain. Make sure to show all the formulas and calculations in addition to any assumption needed.arrow_forward
- Bank Three has equity = $250 million, return on equity (ROE) = 15%, interest expense = $105 million, provision for loans (P) = $30 million, noninterest income = $45 million, noninterest expense = $20 million and a tax rate = : 34%. What is the total interest income required? A. $216.82 million. B. $236.82 million. C. $146.82 million. D. $166.82 million.arrow_forwardWaldorf Company has two sources of funds: long−term debt with a market and book value of $5,200,000 issued at an interest rate of 13%, and equity capital that has a market value of $4,200,000 (book value of $2,400,000). Waldorf Company has profit centers in the following locations with the following operating incomes, total assets, and current liabilities. The cost of equity capital is 13%, while the tax rate is 35%. Operating Income Assets Current Liabilities St. Louis $480,000 $2,600,000 $110,000 Cedar Rapids $600,000 $4,000,000 $300,000 Wichita $1,020,000 $6,000,000 $600,000 What is the EVA® for St. Louis? (Round intermediary calculations to four decimal places.) BIG HINT: The Weighted Average Cost of Capital (WACC) is 10.48% or .1048arrow_forwardAssume the following data for U&P Company: Debt (D) = $100 million; Equity (E) = $300 million; rD = 6%; rE = 12%; and TC = 30%. Calculate the after-tax weighted average cost of capital (WACC): Multiple Choice A) 10.5% B) 10.05% C) 15% D) 9.45%arrow_forward
- Waldorf Company has two sources of funds: long-term debt with a market and book value of $5,300,000 issued at an interest rate of 12%, and equity capital that has a market value of $4,100,000 (book value of $2,100,000). Waldorf Company has profit centers in the following locations with the following operating incomes, total assets, and current liabilities. The cost of equity capital is 12%, while the tax rate is 35%. Operating Income $480,000 $620,000 $1,020,000 Current Liabilities Assets $2,000,000 St. Louis $100,000 $2,000,000 $340,000 Cedar Rapids Wichita $6,000,000 $600,000 What is the EVAⓇ for Cedar Rapids? (Round intermediary calculations to four decimal places.) O A. $403,000 OB. $460,142 C. $210,400 O D. $243,142 ...arrow_forwardGS Co.’s capital structure consists entirely of long-term liabilities and common equity. The cost of capital for long-term liabilities is 3% while for common equity is 5%. The tax rate applicable is 30%. The weighted average cost of capital of GS Co. is 4.13%. What proportion of the company’s capital structure is funded by long-term liabilities?arrow_forwardFama's Llamas has a weighted average cost of capital of 9.7 percent. The company's cost of equity is 12 percent, and its pretax cost of debt is 7.4 percent. The tax rate is 25 percent. What is the company's target debt-equity ratio?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Financial AccountingAccountingISBN:9781337272124Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage Learning
Financial AccountingAccountingISBN:9781305088436Author:Carl Warren, Jim Reeve, Jonathan DuchacPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Financial Accounting
Accounting
ISBN:9781337272124
Author:Carl Warren, James M. Reeve, Jonathan Duchac
Publisher:Cengage Learning
Financial Accounting
Accounting
ISBN:9781305088436
Author:Carl Warren, Jim Reeve, Jonathan Duchac
Publisher:Cengage Learning
Financial leverage explained; Author: The Finance story teller;https://www.youtube.com/watch?v=GESzfA9odgE;License: Standard YouTube License, CC-BY