Your company, which is financed entirely with common equity, plans to manufacture a new product, a cell phone that can be worn like a wristwatch. Two robotic machines are available to make the phone, Machine A and Machine B. The price per phone will be P250.00 regardless of which machine is used to make it. The fixed and variable costs associated with the two machines are shown below, along with the capital (all equity) that must be invested to purchase each machine. The expected sales level is 25,000 units. Your company has tax loss carry-forwards that will cause its tax rate to be zero for the life of the project, so T = 0. How much higher or lower will the project's ROE be if you select the machine that produces the higher ROE, i.e., what is ROEB − ROEA? (Hint: Since the firm uses no debt and its tax rate is zero, ROE = EBIT/Required investment.)
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
Your company, which is financed entirely with common equity, plans to manufacture a new
product, a cell phone that can be worn like a wristwatch. Two robotic machines are
available to make the phone, Machine A and Machine B. The price per phone will be
P250.00 regardless of which machine is used to make it. The fixed and variable costs
associated with the two machines are shown below, along with the capital (all equity) that
must be invested to purchase each machine. The expected sales level is 25,000 units.
Your company has tax loss carry-forwards that will cause its tax rate to be zero for the life
of the project, so T = 0. How much higher or lower will the project's ROE be if you select
the machine that produces the higher ROE, i.e., what is ROEB − ROEA? (Hint: Since the
firm uses no debt and its tax rate is zero, ROE = EBIT/Required investment.)
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