Calculate roel and roeu, Suppose you work for the CEO of a

Calculate roel and roeu

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Reference no: EM1353744

You work for the CEO of a new company that plans to manufacture and sell a new product, a watch that has an embedded TV set and a magnifying glass crystal. The issue now is how to finance the company, with only equity or with a mix of debt and equity. Expected operating income is $400,000. Other data for the firm are shown below. How much higher or lower will the firm's expected ROE be if it uses some debt rather than all equity, i.e., what is ROEL - ROEU?

A company should hold a relatively large amount of cash or marketable securities, or have an adequate line of credit, if its sales tend to fluctuate in an uncertain manner.
0% Debt, U 60% Debt, L
Oper. income (EBIT) $400,000 $400,000
Required investment $2,500,000 $2,500,000
% Debt 0.0% 60.0%
$ of Debt $0.00 $1,500,000
$ of Common equity $2,500,000 $1,000,000
Interest rate NA 10.00%
Tax rate 35% 35%

Senate Inc. is considering two alternative methods for producing playing cards. Method 1 involves using a machine with a fixed cost (mainly depreciation) of $12,000 and variable costs of $1.00 per deck of cards. Method 2 would use a less expensive machine with a fixed cost of only $5,000, but it would require a variable cost of $1.50 per deck. The sale price per deck would be the same under each method. At what unit output level would the two methods provide the same operating income (EBIT)?

Reference no: EM1353744

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