The BOD of ABC Co. is dissatisfied with last year's Retur on equity of 15% and wants to increase it to 20%. If the profit margin and asset turnover remains at 8% and 1.2 respectively, the debt ratio must increase A. by 5% C. by 50% E. C and D 500 FO

The BOD of ABC Co. is dissatisfied with last year's Retur on equity of 15% and wants to increase it to 20%. If the profit margin and asset turnover remains at 8% and 1.2 respectively, the debt ratio must increase A. by 5% C. by 50% E. C and D 500 FO

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter10: Decentralization: Responsibility Accounting, Performance Evaluation, And Transfer Pricing

Section: Chapter Questions

Problem 24E: A company had WACC (weighted average cost of capital) equal to 8. % If the company pays off mortgage...

See similar textbooks

Similar questions

The Gar~ngton O>rporation expects next year's net income to be $ 15 mHo~on. The Grm's debt/as sets ratio cu rrently is 40 perce nt Garlington has$12 mH~on of proGtable invesbnent opportuniti es. and it wishes to maintainexisting debt ratio. According to the residual di,;dend policy. how largeshould Garlington 's dividend pa)'OUtratio be next )"'ar
A firm that is currently unlevered has WACC = rS = 10%/year. This company plans to do a recapitalization by issuing debt and repurchasing equity. After the recapitalization, the debt-to-equity (D/E) ratio will be 0.5. If the cost of debt, rD, is 6%, what will be rS after the recapitalization?
1) A firm that is currently unlevered has WACC = rS = 10%/year. This company plans to do a recapitalization by issuing debt and repurchasing equity. After the recapitalization, the debt-to-equity (D/E) ratio will be 0.5. If the cost of debt, rD, is 6%, what will be rS after the recapitalization? 2) A firm with wD = 0.35 and wS = 0.65 plans to issue another $100 million of permanent debt. The firm's tax rate is 21%. The bonds will be issued at par with coupon rate = rD = 7%/year. The firm's WACC is 11%/year. By how much will the new debt change the value of the firm, and who will receive this value? A) Firm value will increase by $21 million, and all $21 million will go to the shareholders B) Firm value will increase by $9 million, and 35% will go to the bondholders, 65% to the shareholders C) Firm value will increase by $18.6 million, and 35% will go to the bondholders, 65% to the stockholders D) Firm value will increase by $21 million, and all $21 million will go to the…
Company Y has a target debt ratio of 55%. Currently its debt ratio is 60% and it expects to revert to the target ratio in the near future. The company has a market cost of equity of 20%. While it has no bonds, it has interest payments of R1 000 000 on liabilities of R10 000 000. Assume the tax rate is 27%. What is the WACC for the company? a. 6.36% b. 14.05% c. 13.02% d. 9.10%
Tropical Tours is considering an expansion of its operations, which will require the company to issue new debt and equity. Tropical’s investment banker provided the following information about the cost of issuing new debt: If Tropical’s capital structure consists of 60 percent debt, what WACC break points are associated with issuing new debt? Kindly answer with explanation.
Wako and Sons Inc. has no debt, a WACC of 14% and a tax rate of 40%. If the company chooses to change its capital structure to a debt equity ratio of 40% (D/E=0.4), what is the new cost of equity RE? a. 17.4% b. 22.4% c. 19.0% d. 19.6% e. None of the above.
Company Y has a target debt ratio of 55%. Currently its debt ratio is 60% and it expects to revert to the target ratio in the near future. The company has a market cost of equity of 20%. While it has no bonds, it has interest payments of R1 000 000 on liabilities of R10 000 000. Assume the tax rate is 28%. What is the WACC for the company? Ⓒa. 6.36% b. 9.00% c. 12.33% d. 12.96%
K-Life financial services Limited uses risk-adjusted return on capital (RAROC) to measure performance on several aspects. In this regard, imagine that an investment officer wants to execute a transaction with the following characteristics: Probability of default (PD) = 30 basis points Loss given default (LGD) = 55% Exposure at default (EAD) = K 1.45 million Expected loss (EL) = K 2,750 This is a loan to a company in the Agro industrial. The firm’s economic capital (EC) model is based on the 99% confidence level, with an average standard deviation of 2.15%. The risk-free rate of return is 6%. Assume that the bank has set a RAROC hurdle rate of 15% and this transaction has a net profit of K10, 500. REQUIRED: Compute the K-life’s risk-adjusted rate of return on this transaction. Now assume that K-life could also have made a loan for the same amount to a firm in the service industry, and that the standard deviation for economic capital purposes in this case is 1.29%. Compute the bank’s…
The manager of a firm at t=0 has to decide whether to liquidate or to continue. If he decides to continue in t=1, the value of the firm assets will be Va= €140 million assuming business recovers. Nevertheless, the most likely scenario ((1-p) = 85%) is that the company sales will continue declining. Then, company assets will be valued only at Vẞ = €78 million. At what debt value, we see an inefficiency case because Managers' Aversion to Liquidation. a. $60 million O b. None * C. $100 million d. $80 million Your answer is incorrect. The correct answer is: $100 million
What is the Minimum return in pesos
Help me answer this ty
The management of Bravo Ltd wishes to determine a suitable discount rate of the evaluation of new projects during the coming year. The management is happy with the present capita structure. The liability side of the Statement of Financial Position is shown as below: Accounts payable TZS 10,000,000 Аccruals 5,000,000 Short term borrowings 5,000,000 1" Mortgage bonds (8%) 20,000,000 Preferred stock 20,000,000 Common stock 30,000,000 Retained earnings 10,000,000 100,000,000 The firm computes its cost of capital by using book values for weights and it is contemplating a capital expenditure programme of TZS 20 million. The common stocks are currently selling at TZS 600 with floatation cost TZS 100. The Total dividend for the coming year is TZS 30 per share. The dividend for the 4 last years were as follow: Year 2009 2010 2011 2012 Dividends 18.50 22.30 25.00 26.50 New bond with a par value of TZS 1000 can be sold at TZS 950 with a floatation cost equal to 10% of its par value. The maturity…