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Ohio Quarry Inc. has $20 million in assets. Its expected operating income (EBIT) is $4 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 company finances 40 percent of its total assets with debt capital, the pretax cost of funds is 15 percent. Round your answers to the questions below to two decimal places.
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Determine the
rate of return on equity (ROE) under the three different capital structures (0, 20, and 40% debt ratios).
0% debt ratio: %20% debt ratio: %
40% debt ratio: %
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Which capital structure yields the highest expected ROE?
yields the highest expected ROE. -
Determine the ROE under each of the three capital structures (0, 20, and 40% debt ratios) if expected EBIT decreases by 40 percent.
0% debt ratio: %20% debt ratio: %
40% debt ratio: %
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Which capital structure yields the highest ROE calculated in part c?
yields the highest expected ROE. -
Determine the percentage change in ROE under each of the three capital structures (that is, debt ratios) as the result of a 40 percent decline in EBIT. Use the minus sign to enter a negative percentage change in ROE if necessary.
0% debt ratio: %20% debt ratio: %
40% debt ratio: %
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Based on the results in part e, which capital structure yields the highest variability (that is, risk) in ROE?
the highest variability in ROE.
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Determine the percentage change in ROE under each of the three capital structures (that is, debt ratios) as the result of a 40 percent decline in EBIT. Use the minus sign to enter a negative percentage change in ROE if necessary.
0% debt ratio: %20% debt ratio: %
40% debt ratio: %
-
Based on the results in part e, which capital structure yields the highest variability (that is, risk) in ROE?
-
Determine the percentage change in ROE under each of the three capital structures (that is, debt ratios) as the result of a 40 percent decline in EBIT. Use the minus sign to enter a negative percentage change in ROE if necessary.
0% debt ratio: %20% debt ratio: %
40% debt ratio: %
-
Based on the results in part e, which capital structure yields the highest variability (that is, risk) in ROE?
- Libscomb Technologies' annual sales are $6,750,624 and all sales are made on credit, it purchases $3,062,806 of materials each year (and this is its cost of goods sold). Libscomb also has $571,915 of inventory, $1,475,000 of accounts receivable, and $1,400,000 of accounts payable. Assume a 365 day year. What is Libscomb’s Receivables Period (in days)?arrow_forwardAntonio Melton, the chief executive officer of Benson Corporation, has assembled his top advisers to evaluate an investment opportunity. The advisers expect the company to pay $404,000 cash at the beginning of the investment and the cash inflow for each of the following four years to be the following. Note that the annual cash inflows below are net of tax Year 1 $92,000 Year 2 $102,000 Year 3 $130,000 Year 4 $192,000 Mr. Melton agrees with his advisers that the company should use a desired rate of return of 12 percent to compute net present value to evaluate the viability of the proposed project. (PV of $1 and PVA of $1) Note: Use appropriate factor(s) from the tables provided. Required a. Compute the net present value of the proposed project. Should Mr. Melton approve the project? A b.&c. Shawn Love, one of the advisers, is wary of the cash flow forecast and she points out that the advisers failed to consider that the depreciation on equipment used in this project will be tax…arrow_forwardVigo Vacations has $200 million in total assets, $5 million in notes payable, and $21 million in long-term debt. What is the debt ratio? Do not round intermediate calculations. Round your answer to the nearest whole number.arrow_forward
- Patterson Brothers recently reported an EBITDA of $12.5 million and net income of $3.75 million. It had $1.5 million of interest expense, and its corporate tax rate was 25%. What was its charge for depreciation and amortization? Write out your answer completely. For example, 25 million should be entered as 25,000,000. Do not round Intermediate calculations. Round your answer to the nearest dollar, if necessary. $arrow_forwardA company has $350,000 in accounts receivable, $100,000 in current inventory, and $125,000 in accounts payable. What is its working capital? options: $325,000$225,000$450,000 $375,000arrow_forwardLibscomb Technologies' annual sales are $6,974,991 and all sales are made on credit, it purchases $3,511,535 of materials each year (and this is its cost of goods sold). Libscomb also has $550,869 of inventory, $522,928 of accounts receivable, and $477,584 of accounts payable. Assume a 365 day year. What is Libscomb’s Inventory Turnover?arrow_forward
- JohnBoy Industries has a cash balance of $52,000, accounts payable of $132,000, inventory of $182,000, accounts receivable of $217,000, notes payable of $127,000, and accrued wages and taxes of $40,500. How much net working capital does the firm need to fund? Net working capital funding need GAarrow_forwardThe owner of a bicycle repair shop forecasts revenues of $240,000 a year. Variable costs will be $70,000, and rental costs for the shop are $50,000 a year. Depreciation on the repair tools will be $30,000. Prepare an income statement for the shop based on these estimates. The tax rate is 20%. Calculate the operating cash flow for the repair shop using the three methods given below: Dollars in minus dollars out. Adjusted accounting profits. Add back depreciation tax shield.arrow_forwardSuppose you borrow $1,000,000 when financing a coffee shop which is valued at $1,300,000. You expect to generate a cash flow of $1,400,000 at the end of the year. The cost of debt is 5.5%. What is the cost of equity? Note: Express your answers in strictly numerical terms. For example, if the answer is 5%, write 0.05arrow_forward
- Settetocol, Inc., has cash of $12,000, receivables of $35,000, and inventory of $28,000. In addition, the firm has fixed assets of $120,000. Management has also told you that you can reasonably expect to collect 93 percent of the receivables, that the inventory could be sold to realize 84 percent of its book value, and that the sale of the property, plant, and equipment would yield $94,000. What is the liquidation value of this company? (Round to the nearest dollar.)arrow_forwardSubject:- accountingarrow_forwardFor the year ending December 31, 2017, sales for Corporation Y were $68.01 billion. Beginning January 1, 2018 Corporation Y plans to invest 7.5% of their sales amount each year and they expect their sales to increase by 6% each year over the next three years. Corporation Y invests into an account earning an APR of 1.4% compounded continuously. Assume a continuous income stream. How much money will be in the investment account on December 31, 2020? Round your answer to three decimal places. billion dollars How much money did Company Y invest in the account between January 1, 2018 and December 31, 2020? Round your answer to three decimal places. billion dollars How much interest did Company Y earn between January 1, 2018 and December 31, 2020? Round your answer to three decimal places. If intermediate values are used, be sure to use the unrounded values to determine the answer. billion dollars Submit Answer View Previous Question Question 10 of 10 Home My Assignments +Request Extension…arrow_forward
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