Reference no: EM132729447

Problem 1: Spyder Mann has expected sales of $250 million a year. Variable costs are expected to be 75 percent of sales and fixed operating costs are $20000000 a year. Total capital is presently $400000000 and must be expanded to $600000000 to generate the anticipated sales level. The company presently has no debt outstanding, and 2130000 shares of stock. Additional common stock could be sold for $150 a share. The interest rate on new debt would be 6.5 percent and the tax rate is 21 percent. Compute the return on equity and earnings per share assuming the expansion is financed: Sales of $250 million, Var. cost of 75% of sales, Fixed cost of $20000000 per year, new capital needed $200000000 ($600000000 - $400000000), number of shares 2130000 shares, stock price of $150, interest expense of 6.5%, tax of 21%, assume no preferred dividends. a. exclusively with debt, b. exclusively with equity and c. with one-half debt and one-half equity. Calculate return on equity (ROE) and earnings per share (EPS) if expansion is financed by equity.

Group of answer choices

Option 1: 6.2%; $11.09

Option 2: 8.39%; $15.76

Option 3: 5.83%; $10.94

Option 4: 5.6%; $9.69

Option 5: 4.66%; $8.33