Return on investment or return on assets

Assignment Help Financial Management

Reference no: EM131960017

Please consider the following data for the Hercules

Company:

Assets: $3 billion

Equity: $2 billion

Sales: $1.5 billion

EBIT: $300 million

Profit (bt) $200 million

Profit (at) $150 million

Payout ratio is: 30%

Number of common stock shares outstanding is: 50 million shares

a) How much interest is Hercules paying on this debt?

b What is Hercules Company’s current ROE & ROI (return on investment or return on assets)?

c) i) If Hercules were to float (sell) $500 million in bonds and use the proceeds to buy back 12.5 million common shares back, what would be the new ROE & ROI? Hint: What is the implied book/market price for a share of Hercules common stock? (Assume all else remains unchanged).

ii) If Hercules were to float (sell) $500 million in bonds and use the proceeds to buy new plant and equipment that would cause sales to increase to $2.5 billion with an increase in COGS of $800 million, what would be the new ROE & ROI? (Assume the tax rate & the interest 'rate' on debt remains unchanged.)

d) What are the sustainable growth rates for part b), c i) and c ii)?

b) c i) c ii) ____________

Reference no: EM131960017

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