ROE change in response to the change in capital structure

Assignment Help Financial Management
Reference no: EM131980534

1. Last year Hamdi Corp. had sales of $500,000, operating costs of $450,000, and year-end assets (which is equal to its total invested capital) of $435,000. The debt-to-total-capital ratio was 17%, the interest rate on the debt was 7.5%, and the firm's tax rate was 35%. The new CFO wants to see how the ROE would have been affected if the firm had used a 50% debt-to-total-capital ratio. Assume that sales, operating costs, total assets, total invested capital, and the tax rate would not be affected, but the interest rate would rise to 8.0%. By how much would the ROE change in response to the change in the capital structure? Do not round your intermediate calculations.

a. 1.32%

b. 1.67%

c. 1.84%

d. 1.74%

e. 1.90%

2. Your uncle has $1,135,000 and wants to retire. He expects to live for another 25 years and to earn 7.5% on his invested funds. How much could he withdraw at the end of each of the next 25 years and end up with zero in the account?

a. $98,766.96

b. $93,675.88

c. $92,657.67

d. $101,821.61

e. $120,149.50

Reference no: EM131980534

Questions Cloud

Exchange rates between british pounds-japanese yen and euros : Consider the exchange rates between British pounds, Japanese yen, and euros:
The investment fund for the continental soccer league : You are chairperson of the investment fund for the Continental Soccer League. Determine how much revised semiannual payments should be after this rate change.
Calculating long and short position profits : Calculate the amount of money that Calvin Haskins will make (or lose) on each of the following transactions.
What is the total return of the TIPS in percentage : What is the total return of the TIPS in percentage? What is the total return of the TIPS in dollars?
ROE change in response to the change in capital structure : By how much would the ROE change in response to the change in the capital structure? Do not round your intermediate calculations.
What is the effective annual interest rate earned : What is the effective annual interest rate that you pay on the loan? What is the effective annual interest rate earned by your friend?
You only pay interest and never finish paying off full debt : For what monthly payment, you only pay interest and never finish paying off the full debt?
Assuming the payments grow in geometric progression : Future value for an annuity-due, assuming the payments grow in a geometric progression.
How much would the cost reduction improve the ROE : Assets, total invested capital, sales, and the debt to capital ratio would not be affected. By how much would the cost reduction improve the ROE?

Reviews

Write a Review

Financial Management Questions & Answers

  Calculate payout rate-reinvestment rate and stock value

Calculate: Payout Rate, Reinvestment rate, Diviends($) and stock value.

  Examine the butterfly spread created with the options

Three put options on a stock have the same expiration date and strike prices of $55, $60, and $65. The option prices are $3, $8, and $12, respectively. How should an arbitrager take advantage of the arbitrage opportunity if it exists? (Hint: Examine ..

  What is the invoice price of the bond

government bond with a coupon rate of 6% makes semiannual coupon payments on January 13 and July 13 of each year. What is the invoice price of the bond?

  What is the current share price if the required return

A Treasury bond has a face value of $10,000 and is currently priced at $10,165.33. The bond has a current yield of 6.276 percent. What is the coupon rate on a $10,000 bond? Hi-Tek plans to pay a $6 per share dividend one year from today, and will inc..

  Waiting would probably reduce the project risk

Whether to invest in a project today or to postpone the decision until next year is a decision facing the CEO of the Aaron Co. The project has a positive expected NPV, but its cash flows could be less than expected, in which case the NPV could be neg..

  What is the required rate of return

Contoso Corp just paid a $2 dividend per share. It is anticipated that the dividend payments grow at a rate of 5% a year (forever). If the stock of Contoso Corp sells for $50 per share, what is the required rate of return?

  How much is the excess tax credit

Suppose that a 100% payout subsidiary operates in a foreign country with a corporate tax rate of 42% and a withholding tax on dividends of 5%. If the subsidiary has generated a taxable income of $10,000 in the foreign country, and the US corporate ta..

  Using current exchange rates

Using current exchange rates, what is today’s value of the investor’s portfolio in U.S. dollars.

  Compute the present value of deposit in year two

Compute the present value of a $2,100 deposit in year 2 and another $1,600 deposit at the end of year 4 if interest rates are 9 percent.

  What was the closing price of each companys stock

What was the closing price of each company's stock the day before yesterday?- Which company's stock earned a higher percentage return on the day as reported here?

  What must risk-free rate be

A stock has an expected return of 13.4 percent and a beta of 1.15, and the expected return on the market is 12.4 percent. What must the risk-free rate be?

  Emergency response bonds-annual yield to maturity

Evans Emergency Response bonds have 5 years to maturity. Interest is paid semi annually. The bonds have a $1,000 par value and a coupon rate of 9 percent. If the price of the bond is $1,085.55, what is the annual yield to maturity? (Do not round inte..

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd