Consider the following case of Happy Turtle Transportation Company: Suppose Happy Turtle Transportation Company is considering a project that will require $350,000 in assets. • The company is small, so it is exempt from the interest deduction limitation under the new tax law. • The project is expected to produce earnings before interest and taxes (EBIT) of $40,000. • Common equity outstanding will be 10,000 shares. • The company incurs a tax rate of 25%. If the project is financed using 100% equity capital, then Happy Turtle Transportation Company’s return on equity (ROE) on the project will be . In addition, Happy Turtle’s earnings per share (EPS) will be . Alternatively, Happy Turtle Transportation Company’s CFO is also considering financing the project with 50% debt and 50% equity capital. The interest rate on the company’s debt will be 10%. Because the company will finance only 50% of the project with equity, it will have only 5,000 shares outstanding. Happy Turtle Transportation Company’s ROE and the company’s EPS will be if management decides to finance the project with 50% debt and 50% equity. When a firm uses debt financing, the business risk exposure for the firm’s common shareholders will .
Consider the following case of Happy Turtle Transportation Company: Suppose Happy Turtle Transportation Company is considering a project that will require $350,000 in assets. • The company is small, so it is exempt from the interest deduction limitation under the new tax law. • The project is expected to produce earnings before interest and taxes (EBIT) of $40,000. • Common equity outstanding will be 10,000 shares. • The company incurs a tax rate of 25%. If the project is financed using 100% equity capital, then Happy Turtle Transportation Company’s return on equity (ROE) on the project will be . In addition, Happy Turtle’s earnings per share (EPS) will be . Alternatively, Happy Turtle Transportation Company’s CFO is also considering financing the project with 50% debt and 50% equity capital. The interest rate on the company’s debt will be 10%. Because the company will finance only 50% of the project with equity, it will have only 5,000 shares outstanding. Happy Turtle Transportation Company’s ROE and the company’s EPS will be if management decides to finance the project with 50% debt and 50% equity. When a firm uses debt financing, the business risk exposure for the firm’s common shareholders will .
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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Consider the following case of Happy Turtle Transportation Company:
Suppose Happy Turtle Transportation Company is considering a project that will require $350,000 in assets.
| • | The company is small, so it is exempt from the interest deduction limitation under the new tax law. |
| • | The project is expected to produce earnings before interest and taxes (EBIT) of $40,000. |
| • | Common equity outstanding will be 10,000 shares. |
| • | The company incurs a tax rate of 25%. |
If the project is financed using 100% equity capital, then Happy Turtle Transportation Company’s return on equity (ROE) on the project will be . In addition, Happy Turtle’s earnings per share (EPS) will be .
Alternatively, Happy Turtle Transportation Company’s CFO is also considering financing the project with 50% debt and 50% equity capital. The interest rate on the company’s debt will be 10%. Because the company will finance only 50% of the project with equity, it will have only 5,000 shares outstanding. Happy Turtle Transportation Company’s ROE and the company’s EPS will be if management decides to finance the project with 50% debt and 50% equity.
When a firm uses debt financing, the business risk exposure for the firm’s common shareholders will .
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Calculate the return on equity if the project financed with 100% equity as follows:
VIEWCalculate the earnings per share if the project financed with 100% equity as follows:
VIEWCalculate the return on equity if the project financed with 50% equity and 50% debt as follows:
VIEWCalculate the earnings per share if the project financed with 50% equity and 50% debt as follows:
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