Quigley Inc. is considering two financial plans for the coming year. Management expects salesto be $300,000, operating costs to be $265,000, assets (which is equal to its total investedcapital) to be $200,000, and its tax rate to be 35%. Under Plan A it would finance the firmusing 25% debt and 75% common equity. The interest rate on the debt would be 8.8%, butunder a contract with existing bondholders the TIE ratio would have to be maintained at orabove 5.0. Under Plan B, the maximum debt that met the TIE constraint would be employed.Assuming that sales, operating costs, assets, total invested capital, the interest rate, and thetax rate would all remain constant, by how much would the ROE change in response to thechange in the capital structure? Do not round your intermediate calculations. a. 1.68% b.1.85% c. 2.03% d. 1.52% e. 2.31%

ROE is the return earned by shareholders of the company and can be measured as net income divided by…

Answered: Quigley Inc. is considering two…

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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