Last year Kruse Corp had $380,000 of assets (which is equal to its total invested capital), $403,000 of sales, $28,250 of net income, and a debt-to-total-capital ratio of 39%.The new CFO believes the firm has excessive fixed assets and inventory that could be sold, enabling it to reduce its total assets and total invested capital to $252,500. The firmfinances using only debt and common equity. Sales, costs, and net income would not be affected, and the firm would maintain the same capital structure (but with less totaldebt). By how much would the reduction in assets improve the ROE? Do not round your intermediate calculations.a. 5.05%b. 6.15%c. 7.63%d. 5.97%e. 6.28%

ROE is the return on equity and is one important measure of profitability of company and very…

ast year Kruse Corp had $380,000 of assets (which is equal to its total invested capital), $403,000 of sales, $28,250 of net income, an The new CFO believes the firm has excessive fixed assets and inventory that could be sold, enabling it to reduce its total assets and total inances using only debt and common equity. Sales, costs, and net income would not be affected, and the firm would maintain the same ebt). By how much would the reduction in assets improve the ROE? Do not round your intermediate calculations. O a. 5.05% O b. 6.15% O c. 7.63% O d. 5.97%

ast year Kruse Corp had $380,000 of assets (which is equal to its total invested capital), $403,000 of sales, $28,250 of net income, an The new CFO believes the firm has excessive fixed assets and inventory that could be sold, enabling it to reduce its total assets and total inances using only debt and common equity. Sales, costs, and net income would not be affected, and the firm would maintain the same ebt). By how much would the reduction in assets improve the ROE? Do not round your intermediate calculations. O a. 5.05% O b. 6.15% O c. 7.63% O d. 5.97%

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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Meyer Inc's total invested capital is $610,000, and its total debt outstanding is $185,000. The new CFO wants to establish a total debt to total capital ratio of 55%. The size of the firm will not change. How much debt must the company add or subtract to achieve the target debt to capital ratio?
provide correct option
To illustrate the effects of financial leverage for PizzaPalace’s management, consider two hypothetical firms: Firm U (which uses no debt financing) and Firm L (which uses $4,000 of 8% interest rate debt). Both firms have $20,000 in net operating capital, a 25% tax rate, and an expected EBIT of $2,400. (1) Construct partial income statements, which start with EBIT, for the two firms. (2) Calculate NOPAT, ROIC, and ROE for both firms. (3) What does this example illustrate about the impact of financial leverage on ROE? (4) Why did leverage increase ROE in this example?
Do not provide solution in imge format. and also do not provide plagarised content otherwise i dislike. Consider a firm with an EBIT of $865,000. The firm finances its assets with $2,650,000 debt (costing 7.9 percent and is all tax deductible) and 550,000 shares of stock selling at $6.00 per share. To reduce the firm's risk associated with this financial leverage, the firm is considering reducing its debt by $1,000,000 by selling an additional 350,000 shares of stock. The firm's tax rate is 21 percent. The change in capital structure will have no effect on the operations of the firm. Thus, EBIT will remain at $865,000. Calculate the change in the firm's EPS from this change in capital structure. Note: Do not round intermediate calculations and round your final answers to 2 decimal places. EPS before EPS after Difference
Consider two firms – Alpha Co. and Omega Co. – that operate in the manufacturing of mountain bikes and have the same degree of operating leverage. Alpha Co. and Omega Co. have, respectively, no debt and 50 percent debt in their capital structure. Which of the following statements is most accurate? Compared to the Alpha Co., the Omega Co. has: a. the same sensitivity of net income to changes in operating income. b. a lower sensitivity of net income to changes in unit sales. c. the same sensitivity of operating income to changes in unit sales.
Appliances, Inc. has no debt outstanding, and its financial position is given by the following data: Assets (market value = book value) $5,000,000 EBIT $800,000 Cost of equity 12% Stock price $10 Shares outstanding 500,000 Tax rate 25% The firm is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 20% debt based on market values, its cost of equity will increase to 13% to reflect the increased risk. Bonds can be sold at a cost of 6%. Appliance, Inc. is a no-growth firm. Hence, all its earnings are paid out as dividends. Earnings are expected to be constant over time. As a creditor, you are concerned about the company’s ability to repay its debt and interest. What is the new times interest earned?
Jordan, Corp., has debt outstanding with a market value of $3 million. The value of the firmwould be $X million if it were entirely financed by equity. The company also has 360,000shares of stock outstanding that sell at $50 per share. The corporate tax rate is 30 percent. Theexpected bankruptcy cost is 0.9 million. If there is no other market friction like agencycost/benefit, what is X?
The firm's cost of debt is 9 percent, and the cost of retained earnings is 15 percent. However, if the firm exhausts its retained earnings of $236,780, the cost of equity rises to 15.9 percent. Currently management believes that the firm's current combination of 35 percent debt and 65 percent equity is the optimal capital structure.a. What is the firm's cost of capital if it uses only retained earnings?b. What is the firm's cost of capital if it uses new equity?c. How much total financing may the firm have before the marginal cost of capital rises?
Roybus, Inc., a manufacturer of flash memory, just reported that its main production facility in Taiwan was destroyed in a fire. Although the plant was fully insured, the loss of production will decrease Roybus's free cash flow by $181 million at the end of this year and by $63 million at the end of next year. a. If Roybus has 32 million shares outstanding and a weighted average cost of capital of 13.8%, what change in Roybus's stock price would you expect upon this announcement? (Assume that the value of Roybus's debt is not affected by the event.) b. Would you expect to be able to sell Roybus stock on hearing this announcement and make a profit? Explain.

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