Which capital structure yields the highest expected roe

Assignment Help Financial Management

Reference no: EM13927396

Ohio Quarry, Inc., has $12 million in assets. Its expected operating income (EBIT) is $2 million and its income tax rate is 40 percent. If Ohio Quarry finances 20 percent of its total assets with debt capital, the pretax cost of funds is 10 percent. If the com- pany finances 40 percent of its total assets with debt capital, the pretax cost of funds is 15 percent.

a. Determine the rate of return on equity (ROE) under the three different capital structures (0, 20, and 40 percent debt ratios).

b. Which capital structure yields the highest expected ROE?

c. Determine the ROE under each of the three capital structures (0, 20, and 40 percent debt ratios) if expected EBIT decreases by 20 percent.

d. Which capital structure yields the highest ROE calculated in part c?

e. Determine the percentage change in ROE under each of the three capital structures (i.e., debt ratios) as the result of a 20 percent decline in EBIT.

f. Based on the results in part e, which capital structure yields the highest vari- ability (i.e., risk) in ROE?

Reference no: EM13927396

Questions Cloud

Poisson random variable with mean : Suppose that X be a Poisson random variable with mean = 3. Answer (a) - (c) using following Minitab command.

Calculate the t statistic and test the null hypothesis : Do you reject the null hypothesis?

Write compile and run a hello program : With these mechanical details mastered, everything else is comparatively easy - Write, compile and run a hello program.

Evaluate the financial performance of each company : Case Study: Financial Statements for Walmart Stores Inc. and Macy's Inc. The table below contains the financial results for Walmart and Macy's. Evaluate the financial performance of each company based on various metrics such as ROE, ROA, profit marg..

Which capital structure yields the highest expected roe : Which capital structure yields the highest expected ROE? Determine the ROE under each of the three capital structures (0, 20, and 40 percent debt ratios) if expected EBIT decreases by 20 percent.

Determine the companys optimal capital structure : The firm's marginal (and average) income tax rate is 40 percent. Determine the company's optimal capital structure.

Prepare report on target acquisition company financial : Explain how to prepare an executive level report related to the target acquisition company's (General Dynamics Co) financial and operational strengths and weaknesses that addresses the acquiring company's (Boeing Co) external stakeholders.

Establishment of department of homeland security : Discuss the issue of the inclusion of the Federal Emergency Management Agency (FEMA) during the establishment of the Department of Homeland Security (DHS). Would you have allowed it to remain an independent agency reporting directly to the Preside..

Mutually exclusive and independent events : According to a recent poll published in USA TODAY, roughly 54% of U.S. men and 33% of U.S. women believe in extraterrestial aliens. Of U.S. adults, roughly 48% are men and 52% are women.

User Account

All Pages