Suppose Purple Panda Importers is considering a project that will require $350,000 in assets. • The company is small, so it is exempt from the interest deduction limitation under the new tax law. • The project is expected to produce earnings before interest and taxes (EBIT) of $60,000. • Common equity outstanding will be 25,000 shares. • The company incurs a tax rate of 25%. If the project is financed using 100% equity capital, then Purple Panda Importers's return on equity (ROE) on the project will be addition, Purple Panda's earnings per share (EPS) will be Typically, using financial leverage will 12.22% Alternatively, Purple Panda Importers's CFO is also considering financing the project with 50% debt and 50% equity capital. The 15.43% te on the company's debt will be 10%. Because the company will finance only 50% of the project with equity, it will have only 12,500 shar Panda Importers's ROE and the company's EPS will be ding. Purple ct with if management decides to financ 50% debt and 50% equity. a project's expected ROE. 12.86% . In 11.57%
Suppose Purple Panda Importers is considering a project that will require $350,000 in assets. • The company is small, so it is exempt from the interest deduction limitation under the new tax law. • The project is expected to produce earnings before interest and taxes (EBIT) of $60,000. • Common equity outstanding will be 25,000 shares. • The company incurs a tax rate of 25%. If the project is financed using 100% equity capital, then Purple Panda Importers's return on equity (ROE) on the project will be addition, Purple Panda's earnings per share (EPS) will be Typically, using financial leverage will 12.22% Alternatively, Purple Panda Importers's CFO is also considering financing the project with 50% debt and 50% equity capital. The 15.43% te on the company's debt will be 10%. Because the company will finance only 50% of the project with equity, it will have only 12,500 shar Panda Importers's ROE and the company's EPS will be ding. Purple ct with if management decides to financ 50% debt and 50% equity. a project's expected ROE. 12.86% . In 11.57%
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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![2. Business and financial risk
The impact of financial leverage on return on equity and earnings per share
Consider the following case of Purple Panda Importers:
Suppose Purple Panda Importers is considering a project that will require $350,000 in assets.
• The company is small, so it is exempt from the interest deduction limitation under the new tax law.
• The project is expected to produce earnings before interest and taxes (EBIT) of $60,000.
• Common equity outstanding will be 25,000 shares.
• The company incurs a tax rate of 25%.
If the project is financed using 100% equity capital, then Purple Panda Importers's return on equity (ROE) on the project will be
addition, Purple Panda's earnings per share (EPS) will be
Alternatively, Purple Panda Importers's CFO is also considering financing the project with 50% debt and 50% equity capital. The
company's debt will be 10%. Because the company will finance only 50% of the project with equity, it will have only 12,500 shar
Panda Importers's ROE and the company's EPS will be
if management decides to financ
50% debt and 50% equity.
Typically, using financial leverage will
a project's expected ROE.
12.22%
15.43%
12.86%
11.57%
. In
e on the
ding. Purple
ct with](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F95cf937b-6e89-4855-b6ec-e1ecd1ac66ca%2Fb0172768-fd9b-46cf-aed0-9972fcc16ca3%2Fcybesf_processed.jpeg&w=3840&q=75)
Transcribed Image Text:2. Business and financial risk
The impact of financial leverage on return on equity and earnings per share
Consider the following case of Purple Panda Importers:
Suppose Purple Panda Importers is considering a project that will require $350,000 in assets.
• The company is small, so it is exempt from the interest deduction limitation under the new tax law.
• The project is expected to produce earnings before interest and taxes (EBIT) of $60,000.
• Common equity outstanding will be 25,000 shares.
• The company incurs a tax rate of 25%.
If the project is financed using 100% equity capital, then Purple Panda Importers's return on equity (ROE) on the project will be
addition, Purple Panda's earnings per share (EPS) will be
Alternatively, Purple Panda Importers's CFO is also considering financing the project with 50% debt and 50% equity capital. The
company's debt will be 10%. Because the company will finance only 50% of the project with equity, it will have only 12,500 shar
Panda Importers's ROE and the company's EPS will be
if management decides to financ
50% debt and 50% equity.
Typically, using financial leverage will
a project's expected ROE.
12.22%
15.43%
12.86%
11.57%
. In
e on the
ding. Purple
ct with
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