ROE change in response to the change in capital structure

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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

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