None Midwest Packaging's ROE last year was only 4%,but its management has developed a new operatingplan that calls for a total debt ratio of 55%, whichwill result in annual interest charges of $396,000.Management projects an EBIT of $1,296,000 onsales of $12,000,000, and it expects to have a totalassets turnover ratio of 2.3. Under these conditions,the tax rate will be 40%.If the changes are made, what will be its return onequity?

The question requires the determination of the return on equity. Return on equity (ROE) is a metric…

Answered: Midwest Packaging's ROE last year was…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 20P

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Roland & Company has a new management team that has developed an operating plan to improveupon last year’s ROE. The new plan would place the debt ratio at 55 percent, which will result ininterest charges of $7,000 per year. EBIT is projected to be $25,000 on sales of $270,000, it expects tohave a total assets turnover ratio of 3.0, and the average tax rate will be 40 percent. What does Roland& Company expect its return on equity to be following the changes?
Ans
The Boyd Corporation has annual credit sales of $2.8 million. Current expenses for the collection department are $38,000, bad debt losses are 1.6%, and the days sales outstanding is 30 days. The firm is considering easing its collection efforts such that collection expenses will be reduced to $23,000 per year. The change is expected to increase bad - debt losses to 2.6% and to increase the days sales outstanding to 45 days. In addition, sales are expected to increase to $2,825,000 per year. Suppose that the opportunity cost of funds is 18%, the variable cost ratio is 65%, and taxes are 40%. Assuming a 365-day year, calculate the cost of carrying receivables under the current policy and the new policy. Enter your answers as positive values. Do not round intermediate calculations. Round your answers to the nearest dollar.
The Berndt Corporation expects to have sales of $12 million. Costs other than depreciation are expected to be 60% of sales, and depreciation is expected to be $2.4 million. All sales revenues will be collected in cash, and costs other than depreciation must be paid for during the year. Brendt's federal-plus-state tax rate is 40%. Berndt has no debt. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. X Open spreadsheet
The ROE of the Midwest Corporation last year was only 3%. [Note: This information is irrelevant in this problem] This year, its management would like to have a 60% debt-to-assets ratio, which would result in the annual interest expense of $300,000. The company’s management projects the EBIT of $1,000,000 on the total Sales of $10,000,000. They expect to have the total asset turnover ratio of 2. Under these conditions, the corporate tax rate will be 34%. If the changes are made, calculate the firm’s return on equity in the current year.
It is December 31. Last year, Galaxy Corporation had sales of $80,000,000, and it forecasts that next year's sales will be $86,400,000. Its fixed costs have been-and are expected to continue to be-$44,000,000, and its variable cost ratio is 10.00 %. Galaxy's capital structure consists of a $15 million bank loan, on which it pays an interest rate of 12%, and 5,000,000 shares of outstanding common equity. The company's profits are taxed at a marginal rate of 35%. The following are the two principal equations that can be used to calculate a firm's DFL value: DFL (at EBIT = $X) = Given this information, complete the following sentences: Percentage Change in EPS Percentage Change in EBIT Consider the following statement about DFL, and indicate whether or not it is correct. 0 0 DFL (at EBITSX) = • The company's percentage change in EBIT is . The percentage change in Galaxy's earnings per share (EPS) is • The degree of financial leverage (DFL) at $86,400,000 is. (Hint: Use the changes in EPS…
The Berndt Corporation expects to have sales of $15 million. Costs other than depreciation are expected to be 80% of sales, and depreciation is expected to be $1.5 million. All sales revenues will be collected in cash, and costs other than depreciation must be paid for during the year. Brendt's federal-plus-state tax rate is 40%. Berndt has no debt. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. X THAAL Open spreadsheet a. Set up an income statement. What is Berndt's expected net cash flow? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000. Round your answer to the nearest dollar. $ b. Suppose Congress changed the tax laws so that Berndt's depreciation expenses doubled. No changes in operations occurred. What is Berndt's expected net cash flow? Round your answer to the nearest dollar. $ c. Now suppose that Congress changed the…
The Calgary Company is attempting to establish a current assets policy. Fixed assets areTk. 6,00,000 and the firm plans to maintain a 40% debt to assets ratio. The interest rateis 10% on all debt. Three alternative current asset policies are under considerations: 40,50 and 60 percent of projected sales. The company expects to earn 10% before interestand taxes on sales of Tk. 3 million. Calgary`s effective tax rate is 40 percent. What isthe expected return on equity under each alternative?
The Berndt Corporation expects to have sales of $12 million. Costs other thandepreciation are expected to be 75% of sales, and depreciation is expected tobe $1.5 million. All sales revenues will be collected in cash, and costs otherthan depreciation must be paid for during the year. Berndt’s federal-plusstate tax rate is 40%. Berndt has no debt.a. Set up an income statement. What is Berndt’s expected net income? Itsexpected net cash flow?
The Frozen North Construction Company would like to forecast its minimum volume of work (turnover) in order to “break even” (i.e., cover its corporate overheads) for the coming year. The company’s previous year’s corporate overheads were $900,000. The company anticipates 22% inflation and 6% growth in the firm for the coming year. It also expects to achieve a gross margin of 13% on its projects, based on old experience. The company defines gross margin as a percentage of revenue (i.e., selling price). Determine the minimum volume of work, which will allow the Frozen North Company to break even at the end of the coming year.
Pacific Packaging's ROE last year was only 4%, but its management has developed a new operating plan that calls for a debt-to-capital ratio of 40%, which will result in annual interest charges of $720,000. The firm has no plans to use preferred stock, and total assets equal total invested capital. Management projects an EBIT of $2,340,000 on sales of $20,000,000, and it expects to have a total assets turnover ratio of 3.9. Under these conditions, the tax rate will be 25%. If the changes are made, what will be the company's return on equity? Do not round intermediate calculations. Round your answer to two decimal places. %
Apex Ltd. is attempting to determine the optimal level of current assets for the coming year. Management expects sales to increase to $2 million as a result of the just completed asset expansion. Fixed assets total $1 million, and Apex wants to maintain a 60 percent debt ratio. Its interest cost on all debt is 8 percent. Three different current asset levels are being evaluated by the firm. These are (i) a tight policy requiring current assets of 45% of projected sales (ii) a moderate policy with current asset levels being 50% of projected sales (iii) a relaxed policy with current assets being 60% of projected sales. The firm's tax rate is 40%. EBIT = $240,000. What is the expected return on equity under each current asset level?

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