Determine return on equity under different capital structure

Assignment Help Financial Management

Reference no: EM13927408

Citizens Electronics has $25 million in assets. Its expected operating income (EBIT) is $4 million, and its marginal tax rate is 40 percent. If Citizens finances 25 percent of its total assets with debt capital, the pretax cost of funds is 10 per- cent. If it finances 50 percent of its total assets with debt capital, the pretax cost of funds is 15 percent.

a. Determine the return on equity under three different capital structures: 0 percent, 25 percent, and 50 percent debt ratios.

b. Determine the return on equity under each of the three different capital structures if expected EBIT decreases by 20 percent.

c. Determine the return on equity under the three different capital structures as the result of the 20 percent increase in expected EBIT.

Reference no: EM13927408

Questions Cloud

Simplex method to solve linear programming problem : Use the simplex method to solve this linear programming problem.

Issue of debt securities having stock warrants : Proceeds from an issue of debt securities having stock warrants should NOT be allocated between debt and equity features when

Problem regarding the economic order quantity : Q 1: If the Economic Order Quantity (EOQ) model is used to order material, which of the following represents the total annual variable cost that includes the annual costs of ordering and inventory holding?

What are strategies that leaders can use to manage variables : Identify variables present in the environment (culture, market competition, economics, regional conflicts, regulatory restrictions, etc.) that impact motivational strategies at the individual and organizational levels.

Determine return on equity under different capital structure : Determine the return on equity under the three different capital structures as the result of the 20 percent increase in expected EBIT.

Formulate and solve a linear programming model : Formulate and solve a linear programming model for Sam that will help you to advise him if he should lease the booth.

Determine the size of the kanban : Maggie Moylan Motorcycle Corp. uses kanbans to support its transmission assembly line. Determine the size of the kanban for the mainshaft assembly and the number of kanbans needed.

Examples of care, discrimination and health care privacy : Include ways that you have seen this effect in your own life or community.

Determine single vs double compartment model : The following plasma concentrations (in ug/ml) of a new drug were recorded in a patient. Is this data best fit by a single or double compartment model?

User Account

All Pages