. return on equity depending on the adopted financing option and its increase (AROE) possible to obtain due to using the debt, . the degree of financial leverage for each financing option, .threshold EBIT and the threshold return on equity needed for financial leverage to work.
. return on equity depending on the adopted financing option and its increase (AROE) possible to obtain due to using the debt, . the degree of financial leverage for each financing option, .threshold EBIT and the threshold return on equity needed for financial leverage to work.
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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Question
Transcribed Image Text:An enterprise owner is considering three options to raise funds for his business activities, each
with a different source of capital:
• option I-business activities financed exclusively with equity of $600,000,
• option II equity amounts to $450,000, the remaining $150,000 is borrowed from
a bank at the annual rate of 7.6%,
option III equity amounts to $350,000, the remaining $250,000 is borrowed from
a bank at the annual rate of 10.4%.
The annual net sales revenue is expected to reach $760,000 with total operating costs being
$687,000. The enterprise pays 19% income tax. Based on the information provided,
determine:
return on equity depending on the adopted financing option and its increase (AROE)
possible to obtain due to using the debt,
●
the degree of financial leverage for each financing option,
.threshold EBIT and the threshold return on equity needed for financial leverage to
work.
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