Nkt.8 Green Foods currently has $550,000 of equity and is planning an $220,000 expansion to meet increasing demand for its product. Thecompany currently earns $110,000 in net income, and the expansion will yield $55,000 in additional income before any interestexpense.The company has three options: (1) do not expand, (2) expand and issue $220,000 in debt that requires payments of 13% annualInterest, or (3) expand and raise $220,000 from equity financing. For each option, compute (a) net income and (b) return on equity (NetIncome + Equity). Ignore any income tax effects.Note: Round "Return on equity" to 1 decimal place.Income before interest expenseInterest expenseNet incomeEquityReturn on equity1 Don't Expand 2 Debt Financing 3 Equity Financing$ 110,00055,00020.0 %

Return on equity is computed as follows:-Return on equity =

Answered: Green Foods currently has $550,000 of…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter3: Evaluation Of Financial Performance

Section: Chapter Questions

Problem 17P

See similar textbooks

Similar questions

Green Foods currently has $410,000 of equity and is planning an $164,000 expansion to meet increasing demand for its product. The company currently earns $61,500 in net income, and the expansion will yield $30,750 in additional income before any interest expense. The company has three options: (1) do not expand, (2) expand and issue $164,000 in debt that requires payments of 11% annual interest, or (3) expand and raise $164,000 from equity financing. For each option, compute (a) net income and (b) return on equity (Net Income = Equity). Ignore any income tax effects. (Round "Return on equity" to 1 decimal place.) 1 Don't Expand 2 Debt Financing 3 Equity Financing Income before interest expense Interest expense Net income Equity Return on equity % % %
Green Foods currently has $550,000 of equity and is planning an $220,000 expansion to meet increasing demand for its product. The company currently earns $110,000 in net income, and the expansion will yield $55,000 in additional income before any interest expense. The company has three options: (1) do not expand, (2) expand and issue $220,000 in debt that requires payments of 13% annual interest, or (3) expand and raise $220,000 from equity financing. For each option. compute (a) net income and (b) return on equity (Net Income - Equity). Ignore any income tax effects Note: Round "Return on equity" to 1 decimal place. 1 Don't Expand 2 Debt Financing 3 Equity Financing Income before interest expense Interest expense Net income Equity Return on equity
Green Foods currently has $500,000 of equity and is planning an $200,000 expansion to meet increasing demand for its product. The company currently earns $175,000 in net income, and the expansion will yield $87,500 in additional income before any interest expense. The company has three options: (1) do not expand, (2) expand and issue $200,000 in debt that requires payments of 9% annual interest, or (3) expand and raise $200,000 from equity financing. For each option, compute (a) net income and (b) return on equity (Net Income ÷ Equity). Ignore any income tax effects. (Round "Return on equity" to 1 decimal place.)
No-Toxic-Toys currently has $200,000 of equity and is planning an $80,000 expansion to meet increasing demand for its product. The company currently earns $50,000 in net income, and the expansion will yield $25,000 in additional income before any interest expense. The company has three options: (1) do not expand, (2) expand and issue $80,000 in debt that requires payments of 8% annual interest, or (3) expand and raise $80,000 from equity financing. For each option, compute (a) net income and (b) return on equity (Net income ÷ Equity). Ignore any income tax effects.
The Alpha Beta Company is attempting to establish a current assets policy. Fixed assets are $700,000, and the firm plans to maintain a 40% debt-to-assets ratio. Alpha Beta has no operating current liabilities. The interest rate is 12% on all debt. Three alternative current asset policies are under consideration: 30%, 40%, and 70% of projected sales. The company expects to earn 18% before interest and taxes on sales of $5 million. Alpha Beta’s effective federal-plus-state tax rate is 30%. What is the expected return on equity under each asset policy?
Sun Minerals, Inc., is considering issuing additional long-term debt to finance an expansion. Currently, the company has $50 million in 12 percent debt outstanding. Its after-tax net income is $12 million, and the company is in the 40 percent tax bracket. The company is required by the debt holders to maintain its times interest earned ratio at 3.7 or greater. Do not round intermediate calculations. a. What is the present coverage (times interest earned) ratio? Round your answer to one decimal place. times b. How much additional 12 percent debt can the company issue now and maintain its times interest earned ratio at 3.7? (Assume for this calculation that earnings before interest and taxes remain at their present level.) Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. $ million c. If the interest rate on additional debt is 14 percent, how much unused "debt capacity" does the company…
Hunter Corporation expects an EBIT of $30,000 every year forever. The company currently has no debt and its cost of equity is 14 percent. The tax rate is 20 percent. The company is able to borrow at 8 percent. What will the value of the company be if it takes on debt equal to 60 percent of its levered value? [Note: the proceeds from issuing new debt are used to repurchase Hunter’s equity.] Group of answer choices $251,488.1 $171,428.6 $274,285.8 $194,805.2
Trower Corp. has a debt−equity ratio of .80. The company is considering a new plant that will cost $103 million to build. When the company issues new equity, it incurs a flotation cost of 7.3 percent. The flotation cost on new debt is 2.8 percent. What is the initial cost of the plant if the company raises all equity externally? (Enter your answer in dollars, not millions of dollars. Do not round intermediate calculations and round your answer to the nearest whole dollar, e.g., 1,234,567.) Initial cash outflow $ What is the initial cost of the plant if the company typically uses 55 percent retained earnings? (Enter your answer in dollars, not millions of dollars. Do not round intermediate calculations and round your answer to the nearest whole dollar, e.g., 1,234,567.) Initial cash outflow $ What is the initial cost of the plant if the company typically uses 100 percent retained earnings? (Enter your answer in dollars, not millions of dollars. Do not round…
The Thompson Corporation projects an increase in sales from $1.5 millionto $2 million, but it needs an additional $300,000 of current assets to support this expansion. Thompson can finance the expansion by no longertaking discounts, thus increasing accounts payable. Thompson purchasesunder terms of 2/10, net 30, but it can delay payment for an additional35 days—paying in 65 days and thus becoming 35 days past due—withouta penalty because its suppliers currently have excess capacity. What is theeffective, or equivalent, annual cost of the trade credit?
Juicers Inc. is thinking of acquiring Fast Fruit Company. Juicers has determined that Fast Fruit's current cost of equity is 17.5%; Fast Fruit currently has no debt outstanding. In Year 1, Juicers expects Fast Fruit to generate $9 million in NOPAT and invest $50 million in total net operating capital. Fast Fruit will borrow to finance this expansion, with the first interest payment ($5 million) due at Year 2. (There will be no interest due at Year 1.) In Year 2, Fast Fruit will generate $25 million in NOPAT and invest $10 million in total net operating capital. Fast Fruit's marginal tax rate is 25%. After the second year, the free cash flows and the tax shields each will grow at a constant rate of 4%. Assume that all cash flows occur at the end of the year. If Juicers must pay $90 million to acquire Fast Fruit, what is the NPV of the proposed acquisition?
The Haris - Arshi Company is attempting to establish a current assets polıcy. Company has allocated $900,000 to fixed assets and the firm plans to maintain a 50 percent debt to assets a ratio. The interest rate is 10% on all debts. Company is considering three alternative current asset policies: this can be 40, 50 or 60 percent of projected sales. The company expects to earn 20 percent profit before interest and taxes on sales of $3 million. Company's effective federal-plus-state-tax rate is 15 percent. What is the expected return on equity under each alternative? Drawa descriptive conclusion for each Current ASset Investment Policy.
Juicers Inc. is thinking of acquiring Fast Fruit Company. Juicers has determined that Fast Fruit's current cost of equity is 17.5%; Fast Fruit currently has no debt outstanding. In Year 1, Juicers expects Fast Fruit to generate $9 million in NOPAT and invest $50 million in total net operating capital. Fast Fruit will borrow to finance this expansion, with the first interest payment ($5 million) due at Year 2. (There will be no interest due at Year 1.) In Year 2, Fast Fruit will generate $25 million in NOPAT and invest $10 million in total net operating capital. Fast Fruit's marginal tax rate is 25%. After the second year, the free cash flows and the tax shields each will grow at a constant rate of 4%. Assume that all cash flows occur at the end of the year. If Juicers must pay $90 million to acquire Fast Fruit, what is the NPV of the proposed acquisition? (Report your answer in millions of dollars.)

SEE MORE QUESTIONS

Recommended textbooks for you

EBK CONTEMPORARY FINANCIAL MANAGEMENT

Finance

ISBN:

9781337514835

Author:

MOYER

Publisher:

CENGAGE LEARNING - CONSIGNMENT

EBK CONTEMPORARY FINANCIAL MANAGEMENT

Finance

ISBN:

9781337514835

Author:

MOYER

Publisher:

CENGAGE LEARNING - CONSIGNMENT

SEE MORE TEXTBOOKS