The following structure of interest rates is given: Term of Loan Interest Rate 1 year 3% 2 year 4% 5 year 6% 10 year 8% Your firm needs $2,000 to finance its assets. Three possible combinations of sources of finance are listed below: (1) (2) Assets $2,000 Liabilities $0 Assets $2,000 Liabilities $840 (a one-year loan) Equity $2,000 Equity $1,160 (3) Assets $2,000 Liabilities $840 (a 10-year loan) Equity $1,160 The firm expects to generate revenues of $2,550 and have operating expenses of $2,120. If the firm's tax rate is 40 percent, what is the return on equity under each choice? Round your answers to two decimal places. Choice 1: % Choice 2: % Choice 3: % During the second year, sales decline to $2,200 while operating expenses decline to $1,900. The structure of interest rates becomes: Term of Loan Interest Rate 1 year 5% 2 year 6% 5 year 7% 10 year 10% Given the three choices in the previous year, what is the return on equity for the firm during the second year? Round your answers to two decimal places. Choice 1: % Choice 2: % Choice 3: % What is the implication of using short-term instead of long-term debt during the two years? The increased use of short-term debt instead of long-term debt resulted in the in the return on the equity.
The following structure of interest rates is given:
| Term of Loan | Interest Rate | ||
| 1 year | 3% | ||
| 2 year | 4% | ||
| 5 year | 6% | ||
| 10 year | 8% |
Your firm needs $2,000 to finance its assets. Three possible combinations of sources of finance are listed below:
| (1) | (2) | ||||||||||
| Assets | $2,000 | Liabilities | $0 | Assets | $2,000 | Liabilities | $840 | ||||
| (a one-year loan) | |||||||||||
| Equity | $2,000 | Equity | $1,160 | ||||||||
| (3) | |||||||||||
| Assets | $2,000 | Liabilities | $840 | ||||||||
| (a 10-year loan) | |||||||||||
| Equity | $1,160 |
-
The firm expects to generate revenues of $2,550 and have operating expenses of $2,120. If the firm's tax rate is 40 percent, what is the
return on equity under each choice? Round your answers to two decimal places.Choice 1: %
Choice 2: %
Choice 3: %
-
During the second year, sales decline to $2,200 while operating expenses decline to $1,900. The structure of interest rates becomes:
Term of Loan Interest Rate 1 year 5% 2 year 6% 5 year 7% 10 year 10% Given the three choices in the previous year, what is the return on equity for the firm during the second year? Round your answers to two decimal places.
Choice 1: %
Choice 2: %
Choice 3: %
-
What is the implication of using short-term instead of long-term debt during the two years?
The increased use of short-term debt instead of long-term debt resulted in the in the return on the equity.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 3 images
