Pacific Packaging’s ROE last year was only 5%, but its managementhas developed a new operating plan that calls for a debt-to-capital ratio of 40%, which willresult in annual interest charges of $561,000. The firm has no plans to use preferred stockand total assets equal total invested capital. Management projects an EBIT of $1,258,000 onsales of $17,000,000, and it expects to have a total assets turnover ratio of 2.1. Under theseconditions, the tax rate will be 35%. If the changes are made, what will be the company’sreturn on equity?

Pacific Packaging’s ROE last year was only 5%, but its managementhas developed a new operating plan that calls for a debt-to-capital ratio of 40%, which willresult in annual interest charges of $561,000. The firm has no plans to use preferred stockand total assets equal total invested capital. Management projects an EBIT of $1,258,000 onsales of $17,000,000, and it expects to have a total assets turnover ratio of 2.1. Under theseconditions, the tax rate will be 35%. If the changes are made, what will be the company’sreturn on equity?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter13: Capital Structure Concepts

Section: Chapter Questions

Problem 6P

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