Reference no: EM133057024
Mammoth Pictures Inc. is a small company and is considering a project that will require $600,000 in assets. The project will be financed with 100% equity. The company faces a tax rate of 25%. What will be the ROE (return on equity) for this project if it produces an EBIT (earnings before interest and taxes) of $160,000?
Determine what the project's ROE will be if its EBIT is -$60,000. When calculating the tax effects, assume that Mammoth Pictures Inc. as a whole will have a large, positive income this year.
Mammoth Pictures Inc. is also considering financing the project with 50% equity and 50% debt. The interest rate on the company's debt will be 11%. What will be the project's ROE if it produces an EBIT of $160,000?
What will be the project's ROE if it produces an EBIT of -$60,000 and it finances 50% of the project with equity and 50% with debt? When calculating the tax effects, assume that Mammoth Pictures Inc. as a whole will have a large, positive income this year.
The use of financial leverage _________ the expected ROE _________, the probability of a large loss, and consequently __________ the risk borne by stockholders. The greater the firm's chance of bankruptcy, the ___________ its optimal debt ratio will be _________. manager is more likely to use debt in an effort to boost profits.