Q307WOHHourly1000 10012SubreyRETURN ON EQUITY Pacific Packaging's ROE last year was only 5%, but its managementhas developed a new operating plan that calls for a debt-to-capital ratio of 40%, which willresult in annual interest charges of $561,000. The firm has no plans to use preferred stockand total assets equal total invested capital. Management projects an EBIT of $1,258,000 onsales of $17,000,000, and it expects to have a total assets turnover ratio of 2.1. Under theseconditions, the tax rate will be 35%. If the changes are made, what will be the company'sreturn on equity?

ROE is Return on Equity is one of important profitability ratio and shows how much is gains and…

Answered: RETURN ON EQUITY Pacific Packaging's…

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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Stevenson's Bakery is an all-equity firm that has projected perpetual EBIT of $189,000 per year. The cost of equity is 13.5 percent and the tax rate is 35 percent. The firm can borrow perpetual debt at 6.1 percent. Currently, the firm is considering converting to a debt-equity ratio of .99. What is the firm's levered value? Multiple Choice $1,068,450 $910,000 $989,225 $1,150,638 $819,000
On January 1, the total market value of the Tysseland Company was $60 million. During the year, the company plans to raise and invest $30 million in new projects. The firm's present market value capital structure, here below, is considered to be optimal. There is no short-term debt. Debt Common equity Total capital $30,000,000 30,000,000 $60,000,000 New bonds will have a 9% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. The stockholders' required rate of return is estimated to be 12%, consisting of a dividend yield of 4% and an expected constant growth rate of 8%. (The next expected dividend is $1.20, so the dividend yield is $1.20/$30 = 4%.) The marginal tax rate is 25%. a. In order to maintain the present capital structure, how much of the new investment must be financed by common equity? Round your answer to the nearest dollar. $ b. Assuming there is sufficient cash flow for Tysseland to maintain its target capital structure without…
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On January 1, 2009 the total assets of the Shipley Company were $ 180 million. During the year, the company plans to raise and invest $ 90 million. The firm's present capital structure is considered optimal.Assume that there is no short term debt. Long term debt 90,000,000 Common Equity 90, 000, 000 Total Liabilities and Equity 180,000,000 Project B Cash flow (2000) New bonds will have a coupon rate of 10% and will sell at par. Common stock, currently selling at $ 40 a share can be sold to net the company at$36 a share. Stockholders' required rate of return is 12%. (The next expected dividend is $1.60). Retained earnings are estimated to be $9 million. The tax rate is 40%. a. To maintain the present capital structure, how much of the capital budget must Shipley finance by equity? b. How much of the new equity funds needed must be generated internally?Externally? c. Calculate the cost of each of the equity components. d. Calculate the weighted average cost of capital.
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National Company expects P30,000,00 in earnings next year. Its dividend payout ratio is 40%, and its equity to asset ratio is 40%. National Company uses no preferred stock. At what amount of financing will there be a break point in National Company’s cost of capital?
Wanbay Corporation is interested in estimating its additional financing needed to support a growth in sales next year. Last year, revenues were RM1million; net profit margin was 6 percent; investment in assets was RM750,000; payables and accruals were RM100,000; stockholders’ equity at the end of the year was RM450,000. The venture did not pay out any dividends and does not expect to pay dividends for the future. Elaborate the concept of sustainable sales growth rates in relation to the additional fund needed (AFN). Calculate the additional fund needed (AFN) next year to support a 30 percent increase in sales. If the expected sales growth were only 15 percent, compute the change in the additional fund needed (AFN).

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