Problem 2. Last year Jullan Corp. had sales of P303,225, operating costs of P267,500, and year- end assets of P195,000. The debt-to-total-assets ratio was 27%, the interest rate on the debt was 8.2%, and the firm's tax rate was 37%. The new CFO wants to see how the Return on Equity (ROE) would have been affected if the firm had used a 45% debt ratio. Assume that sales and total assets would not be affected, and that the interest rate and tax rate would both remain constant. By how much would the ROE change (increase or decrease in percentage) in response to the change in the capital structure?
Problem 2. Last year Jullan Corp. had sales of P303,225, operating costs of P267,500, and year- end assets of P195,000. The debt-to-total-assets ratio was 27%, the interest rate on the debt was 8.2%, and the firm's tax rate was 37%. The new CFO wants to see how the Return on Equity (ROE) would have been affected if the firm had used a 45% debt ratio. Assume that sales and total assets would not be affected, and that the interest rate and tax rate would both remain constant. By how much would the ROE change (increase or decrease in percentage) in response to the change in the capital structure?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Problem 2. Last year Jullan Corp. had sales of P303,225, operating costs of P267,500, and year
end assets of P195,000. The debt-to-total-assets ratio was 27%, the interest rate on the debt
was 8.2%, and the firm's tax rate was 37%. The new CFO wants to see how the Return on Equity
(ROE) would have been affected if the firm had used a 45% debt ratio. Assume that sales and
total assets would not be affected, and that the interest rate and tax rate would both remain
constant. By how much would the ROE change (increase or decrease in percentage) in response
to the change in the capital structure?
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