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
What will be its return on equity??
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Steber Packaging Inc. expects sales next year of $40 million. Of this total, 45 percent is expected to be for cash and the balance will be on credit, payable in 30 days. Operating expenses are expected to total $17 million. Accelerated depreciation is expected to total $12 million, although the company will only report $8 million of depreciation on its public financial reports. The marginal tax rate for Steber is 34 percent. Current assets now total $26 million and current liabilities total $14 million. Current assets are expected to increase to $29 million over the coming year. Current liabilities are expected to increase to $20 million. Compute the projected after-tax operating cash flow for Steber during the coming year. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. $ million
Steber Packaging Inc. expects sales next year of $42 million. Of this total, 40 percent is expected to be for cash and the balance will be on credit, payable in 30 days. Operating expenses are expected to total $22 million. Accelerated depreciation is expected to total $9 million, although the company will only report $5 million of depreciation on its public financial reports. The marginal tax rate for Steber is 34 percent. Current assets now total $26 million and current liabilities total $14 million. Current assets are expected to increase to $29 million over the coming year. Current liabilities are expected to increase to $17 million. Compute the projected after-tax operating cash flow for Steber during the coming year. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
Kottinger's Kamp Supplies is considering an investment in new manufacturing equipment. The equipment costs $220,000 and will provide annual after-tax inflows of $50,000 at the end of each of the next seven years. The firm's market value debt/equity ratio is 25%, its cost of equity is 14%, and its pre-tax cost of debt is 7%. The flotation costs of debt and equity are 3% and 9%, respectively. The firm's combined marginal federal and provincial tax rate is 40%. Assume the project is of approximately the same risk as the firm's existing operations. What is Kottinger's weighted average cost of capital? Multiple Choice O O 8.91% 11.14% 10.86% 12.04% O 9.99%
Sambonoza Enterprises projects its sales next year to be $4 million and expects to earn 5 percent of that amount after taxes. The firm is currently in the process of projecting its financing needs and has made the following assumptions (projections): 1. Current assets will equal 20 percent of sales, and fixed assets will remain at their current level of $1 million. 2. Common equity is currently $0.8 million, and the firm pays out half its after-tax earnings in dividends. 3. The firm has short-term payables and trade credit that normally equal 10 percent of sales, and it has no long- term debt outstanding. What are Sambonoza's financing requirements (i.e., total assets) and discretionary financing needs (DFN) for the coming year?
Payne Products had $2.4 million in sales revenues in the most recent year and expects sales growth to be 25% this year. Payne would like to determine the effect of various current assets policies on its financial performance. Payne has $2 million of fixed assets and intends to keep its debt ratio at its historical level of 60%. Payne's debt interest rate is currently 10%. You are to evaluate three different current asset policies: (1) a restricted policy in which current assets are 45% of projected sales, (2) a moderate policy with 50% of sales tied up in current assets, and (3) a relaxed policy requiring current assets of 60% of sales. Earnings before interest and taxes are expected to be 14% of sales. Payne's tax rate is 35%, a. What is the expected return on equity under each current asset level? Round your answers to two decimal places. Tight policy % 76.77 Moderate policy Relaxed policy 9.04 5.05 1% b. In this problem, we have assumed that the level of expected sales is…
Payne Products had $1.6 million in sales revenues in the most recent year and expects sales growth to be 25% this year. Payne would like to determine the effect of various current assets policies on its financial performance. Payne has $1 million of fixed assets and intends to keep its debt ratio at its historical level of 40%. Payne’s debt interest rate is currently 8%. You are to evaluate three different current asset policies: (1) a restricted policy in which current assets are 45% of projected sales, (2) a moderate policy with 50% of sales tied up in current assets, and (3) a relaxed policy requiring current assets of 60% of sales. Earnings before interest and taxes are expected to be 12% of sales. Payne’s tax rate is 25%. What is the expected return on equity under each current asset level? In this problem, we have assumed that the level of expected sales is independent of current asset policy. Is this a valid assumption? Why or why not? How would the overall risk of…
ABC Company expects sales next year to be $1,450,000, up from $600,000 this year. Inventory and account receivable will increase by $200,000 to accommodate this higher sales level. The company has a steady profit margin of 10%, and has historically paid out 20% of after tax earnings as dividends. How much external funding will the company have to take on? Assume there is no increase in liabilities other than that which will occur with the external financing.
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

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