Ohio Quarry Inc. has $20 million in assets. Its expected operating income (EBIT) is $4 million and its income tax rate is 40 percent. If Ohio Quarry finances 20 percent of its total assets with debt capital, the pretax cost of funds is 10 percent. If the company finances 40 percent of its total assets with debt capital, the pretax cost of funds is 15 percent. Round your answers to the questions below to two decimal places.Determine the rate of return on equity (ROE) under the three different capital structures (0, 20, and 40% debt ratios).0% debt ratio: %20% debt ratio: %40% debt ratio: %Which capital structure yields the highest expected ROE? yields the highest expected ROE.Determine the ROE under each of the three capital structures (0, 20, and 40% debt ratios) if expected EBIT decreases by 40 percent.0% debt ratio: %20% debt ratio: %40% debt ratio: %Which capital structure yields the highest ROE calculated in part c? yields the highest expected ROE.Determine the percentage change in ROE under each of the three capital structures (that is, debt ratios) as the result of a 40 percent decline in EBIT. Use the minus sign to enter a negative percentage change in ROE if necessary.0% debt ratio: %20% debt ratio: %40% debt ratio: %Based on the results in part e, which capital structure yields the highest variability (that is, risk) in ROE? the highest variability in ROE.

rate of return on equity = earning after interest and tax value of shareholder's equity× 100 assets…

Answered: Ohio Quarry Inc. has $20 million in…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Ohio Quarry Inc. has $20 million in assets. Its expected operating income (EBIT) is $4 million and its income tax rate is 40 percent. If Ohio Quarry finances 20 percent of its total assets with debt capital, the pretax cost of funds is 10 percent. If the company finances 40 percent of its total assets with debt capital, the pretax cost of funds is 15 percent. Round your answers to the questions below to two decimal places.

Determine the rate of return on equity (ROE) under the three different capital structures (0, 20, and 40% debt ratios).
0% debt ratio:    %

20% debt ratio:    %

40% debt ratio:    %
Which capital structure yields the highest expected ROE?
yields the highest expected ROE.
Determine the ROE under each of the three capital structures (0, 20, and 40% debt ratios) if expected EBIT decreases by 40 percent.
0% debt ratio:    %

20% debt ratio:    %

40% debt ratio:    %
Which capital structure yields the highest ROE calculated in part c?
yields the highest expected ROE.
Determine the percentage change in ROE under each of the three capital structures (that is, debt ratios) as the result of a 40 percent decline in EBIT. Use the minus sign to enter a negative percentage change in ROE if necessary.
0% debt ratio:    %

20% debt ratio:    %

40% debt ratio:    %
Based on the results in part e, which capital structure yields the highest variability (that is, risk) in ROE?
the highest variability in ROE.

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Determine the percentage change in ROE under each of the three capital structures (that is, debt ratios) as the result of a 40 percent decline in EBIT. Use the minus sign to enter a negative percentage change in ROE if necessary.
0% debt ratio:    %

20% debt ratio:    %

40% debt ratio:    %
Based on the results in part e, which capital structure yields the highest variability (that is, risk) in ROE?

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