u are given the following information concerning a firm: sets required for operation: $5,700,000 venues: $8,600,000 perating expenses: $8,100,000 come tax rate: 40%. anagement faces three possible combinations of financing: 1. 100% equity financing 2. 35% debt financing with a 5% interest rate 3. 70% debt financing with a 5% interest rate a. What is the net income for each combination of debt and equity financing? Round your answers to the nearest dollar. 1 Net income $ 2 3 $ b. What is the return on equity for each combination of debt and equity financing? Round your answers to one decimal place. Return on equity 1 2 3 % % % c. If the interest rate had been 10 percent instead of 5 percent, what would be the return on equity for each combination of debt and equity financing? Round your answers to one decimal place. Return on equity 1 2 3 % % % d. What is the implication of the use of financial leverage when interest rates change? The use of financial leverage is likely to -Select- the return to the common stockholders if the rate of interest is low. If the rate of interest exceeds (after adjusting for taxes) the return earned on the borrowed funds, the return to the common stockholder is likely to -Select- the use of financial leverage. by
u are given the following information concerning a firm: sets required for operation: $5,700,000 venues: $8,600,000 perating expenses: $8,100,000 come tax rate: 40%. anagement faces three possible combinations of financing: 1. 100% equity financing 2. 35% debt financing with a 5% interest rate 3. 70% debt financing with a 5% interest rate a. What is the net income for each combination of debt and equity financing? Round your answers to the nearest dollar. 1 Net income $ 2 3 $ b. What is the return on equity for each combination of debt and equity financing? Round your answers to one decimal place. Return on equity 1 2 3 % % % c. If the interest rate had been 10 percent instead of 5 percent, what would be the return on equity for each combination of debt and equity financing? Round your answers to one decimal place. Return on equity 1 2 3 % % % d. What is the implication of the use of financial leverage when interest rates change? The use of financial leverage is likely to -Select- the return to the common stockholders if the rate of interest is low. If the rate of interest exceeds (after adjusting for taxes) the return earned on the borrowed funds, the return to the common stockholder is likely to -Select- the use of financial leverage. by
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:u are given the following information concerning a firm:
sets required for operation: $5,700,000
evenues: $8,600,000
berating expenses: $8,100,000
come tax rate: 40%.
anagement faces three possible combinations of financing:
1. 100% equity financing
2. 35% debt financing with a 5% interest rate
3. 70% debt financing with a 5% interest rate
a. What is the net income for each combination of debt and equity financing? Round your answers to the nearest dollar.
1
Net income
$
2
3
$
b. What is the return on equity for each combination of debt and equity financing? Round your answers to one decimal place.
Return on equity
1
2
3
%
%
%
c. If the interest rate had been 10 percent instead of 5 percent, what would be the return on equity for each combination of debt and equity
financing? Round your answers to one decimal place.
Return on equity
1
2
3
%
%
%
d. What is the implication of the use of financial leverage when interest rates change?
The use of financial leverage is likely to -Select- the return to the common stockholders if the rate of interest is low. If the rate of interest
exceeds (after adjusting for taxes) the return earned on the borrowed funds, the return to the common stockholder is likely to -Select- by
the use of financial leverage.
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