Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Transcribed Image Text:A firm has an ROE of 2%, a debt/equity ratio of 0.6, a tax rate of 30%, and pays an
interest rate of 7% on its debt. What is its operating ROA? (Do not round
intermediate calculations. Round your answer to 2 decimal places.)
ROA
%
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- Problem 16-3 ROE and Leverage [LO1, 2] Fujita, Incorporated, has no debt outstanding and a total market value of $356,900. Earnings before Interest and taxes, EBIT, are projected to be $50,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 16 percent higher. If there is a recession, then EBIT will be 25 percent lower. The company is considering a $180,000 debt Issue with an interest rate of 5 percent. The proceeds will be used to repurchase shares of stock. There are currently 8,300 shares outstanding. Ignore taxes for questions (a) and (b). Assume the company has a market- to-book ratio of 1.0 and the stock price remains constant. a-1. Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued. (Do not round Intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) a-2. Calculate the percentage changes in ROE when the economy expands or enters a…arrow_forwardA firm had a debt ratio of 0.85. The pretax cost of debt is 8% and the reqiured return on asset is 15.5%. What is the cost of equity if we factorin the firms tax rate of 24%? A) 19.53 B) 18.92 C) 21.57 D) 20.35 E) 20.96arrow_forwardKodi Company has a debt-equity ratio of 1.33. Return on assets is 7.58 percent, and total equity is $665,000. a. What is the equity multiplier? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. b. What is the return on equity? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. c. What is the net income? Note: Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32. a. Equity multiplier b. Return on equity c. Net income times %arrow_forward
- Help mearrow_forwardneed help with this question pleasearrow_forwardUse the following information about Red Rocks Inc. to answer the following question: Assume the following: Pays no taxes Return on net operating assets (RNOA) = 18% %3D Has $2,000 in net operating assets financed by equity At the beg. of the year borrows $1000 at 8%. Uses debt to buy additional operating assets. What is the return on equity (ROE) for Red Rocks? Edit View Insert Format Tools Table 12pt v Paragraph v B IU A e T?v I.arrow_forward
- Assume the firm has a tax rate of 23 percent. c-1. Calculate return on equity (ROE) under each of the three economic scenarios before any debt is Issued. (Do not round Intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) c-2. Calculate the percentage changes in ROE when the economy expands or enters a recession. (A negative answer should be indicated by a minus sign. Do not round Intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) c-3. Calculate the return on equity (ROE) under each of the three economic scenarios assuming the firm goes through with the recapitalization. (Do not round Intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) c-4. Given the recapitalization, calculate the percentage changes in ROE when the economy expands or enters a recession. (A negative answer should be indicated by a minus sign. Do not round…arrow_forwardAssume that the current ratio for Arch Company is 3.5, its acid-test ratio is 2.0, and its working capital is $360,000. Answer each of the following questions independently, always referring to the original information. Required: If the firm pays an account payable of $53,000, what will its new current ratio and working capital be? Note: Do not round intermediate calculations. Round "Current ratio" to 1 decimal place. If the firm sells inventory that was purchased for $50,000 at a cash price of $64,000, what will its new acid-test ratio be? Note: Do not round intermediate calculations. Round your answer to 1 decimal place.arrow_forwardonly looking for parts c-1 and c-3arrow_forward
- Question: Fama's Llamas has a weighted average cost of capital of 9.5%. The company's cost of equity is 11%, and its cost of debt is 7.5%. The tax rate is 40%. What is the company's debt- equity ratio? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.)arrow_forwardSubject:- financearrow_forward
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