Explanation Solution: Given, Return on equity with debt is 19.2%. Return on equity without debt is 12%. Formula to calculate difference in return on equity with 50% debt and fully financed from equity is, Difference = Return on Equity with Debt − Return on Equity without Debt Substitute 19.2% for return on equity with debt and 12% for return on equity without debt. Difference = 19.2 % − 12 % = 7.2 % Thus, difference is 7.2%. Working notes: Calculate Earnings before interest and tax. Given, Total asset is 1,000,000. Basic earnings power ratio is 20%. The formula to calculate EBIT of the company is, EBIT = Total Assets × Basic Earnings Power Substitute $1,000,000 for total assets and 20% for basic earnings power in above formula. EBIT = $ 1 , 000 , 000 × 20 % = $ 200 , 000 Thus, EBIT of the company is $200,000. Calculate return on equity if the company has zero debt. Given, EBIT of the company is $200,000. Tax rate is 40%. Total asset is $1,000,000. Weight of equity is 100%. The formula to calculate return on equity is, Return on Equity = EBIT ( 1 − Tax Rate ) Total Assets × Weight of Equity Substitute $200,000 for EBIT, 40% for tax rate, $1,000,000 for total assets and 100% for weight of equity. Return on Equity = $ 200 , 000 ( 1 − 40 % ) $ 1 , 000 , 000 × 100 % = $ 120 , 000 $ 1 , 000 , 000 = 12 % Thus, return on equity is 12% Calculate annual interest expense if the company’s capital consists 50% debt

Fundamentals of Financial Management (MindTap Course List)

14th Edition

ISBN: 9781285867977

Author: Eugene F. Brigham, Joel F. Houston

Publisher: Cengage Learning

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Contract Costing

Contract costing is about tracing particular costs related to a particular contract entered into with the customer. It is one of the forms of job order costing. It is useful in long-term contracts at the most. It is seen that substantial time is required…

Question

Chapter 4, Problem 16P

Summary Introduction

To identify: The difference in return on equity with 50% debt and entirely financed with common stock.

Return on equity: Return on equity is the return from the equity. It is the ratio of net income and shareholders’ equity. This ratio measures the performance of the company and tells how well the company is performing. This ratio is used to compare own firm with competitors.

Expert Solution & Answer

Chapter 4 Solutions

Fundamentals of Financial Management (MindTap Course List)

Ch. 4 - Financial ratio analysis is conducted by three...Ch. 4 - Prob. 2Q Ch. 4 - Over the past year, M.D. Ryngaert Co. had an...Ch. 4 - Profit margins and turnover ratios vary from one...Ch. 4 - How does inflation distort ratio analysis...Ch. 4 - Prob. 6Q Ch. 4 - Give some examples that illustrate how (a)...Ch. 4 - Why is it sometimes misleading to compare a...Ch. 4 - Suppose you were comparing a discount merchandiser...Ch. 4 - Prob. 10Q

Ch. 4 - Differentiate between ROE and ROIC.Ch. 4 - Prob. 12Q Ch. 4 - DAYS SALES OUTSTANDING Baker Brothers has a DSO of...Ch. 4 - DEBT TO CAPITAL RATIO Bartley Barstools has a...Ch. 4 - DuPONT ANALYSIS Doublewide Dealers has an ROA of...Ch. 4 - MARKET/BOOK RATIO Jaster Jets has 10 billion in...Ch. 4 - PRICE/EARNINGS RATIO A company has an EPS of 2.00,...Ch. 4 - DuPONT AND ROE A firm has a profit margin of 2%...Ch. 4 - Prob. 7P Ch. 4 - DuPONT AND NET INCOME Ebersoll Mining has 6...Ch. 4 - BEP, ROE, AND ROIC Duval Manufacturing recently...Ch. 4 - M/B AND SHARE PRICE You are given the following...Ch. 4 - RATIO CALCULATIONS Assume the following...Ch. 4 - RATIO CALCULATIONS Graser Trucking has 12 billion...Ch. 4 - TIE AND ROIC RATIOS The H.R. Pickett Corp. has...Ch. 4 - Prob. 14P Ch. 4 - RETURN ON EQUITY AND QUICK RATIO Lloyd Inc. has...Ch. 4 - Prob. 16P Ch. 4 - CONCEPTUAL: RETURN ON EQUITY Which of the...Ch. 4 - TIE RATIO AEI Incorporated has 5 billion in...Ch. 4 - CURRENT RATIO The Petry Company has 1312,500 in...Ch. 4 - DSO AND ACCOUNTS RECEIVABLE Harrelson Inc....Ch. 4 - P/E AND STOCK PRICE Fontaine Inc. recently...Ch. 4 - BALANCE SHEET ANALYSIS Complete the balance sheet...Ch. 4 - RATIO ANALYSIS Data for Barry Computer Co. and its...Ch. 4 - DUPONT ANALYSIS A firm has been experiencing low...Ch. 4 - RATIO ANALYSIS The Corrigan Corporations 2014 and...Ch. 4 - Prob. 26IC Ch. 4 - Conducting a Financial Ratio Analysis on HP INC....Ch. 4 - Conducting a Financial Ratio Analysis on HP INC....Ch. 4 - Prob. 3TCL Ch. 4 - Conducting a Financial Ratio Analysis on HP INC....Ch. 4 - Conducting a Financial Ratio Analysis on HP INC....Ch. 4 - Conducting a Financial Ratio Analysis on HP INC....Ch. 4 - Conducting a Financial Ratio Analysis on HP INC....Ch. 4 - Conducting a Financial Ratio Analysis on HP INC....

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