You have the following information about two firms, Debt Free, Incorporated and Debt Spree, Incorporated. Both firms have the sameprospects for sales and EBIT, and both have the same level of assets, tax rate and borrowing rate. They differ in their use of debtfinancing.ScenarioSalesBad year$ 200EBIT$ 28Normal year$ 275$ 36Good year$ 380$ 52Total assetsTax rateDebtEquityBorrowing rateDebt Free$ 250Debt Spree21%$ 25021%$ 0$ 250$ 150$ 10016%16%Required:a. Calculate the interest expense for each firm:Interest expense for Debt FreeInterest expense for Debt Spreeb. Calculate the following items for each firm for each scenario (bad year, normal year, good year): return on assets (ROA), net profit,and return on equity (ROE). (Use a minus sign to indicate negative answers. Round your answers to 2 decimal places.)ScenarioBad yearNormal yearGood yearROADebt FreeNet ProfitDebt SpreeROEROANet ProfitROE%%%%%%%%%%%

The objective of the question is to calculate the interest expense for each firm, and then calculate…

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FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Hello, having some trouble with my accounting homework. There are drop down boxes for question 2, and here are the options: Dropdown box #1: Both companies' debt-paying abilities are (medium, strong, weak). Dropdown box #2: From the standpoint of leverage (debt) (the companies are about equal, BestBuy is stronger, Modern is stronger). Dropdown box #3: (Modern has a stronger times-interest-earned ratio, The times-interest-earned ratios are about equal for both companies, Best Buy has a stronger times-interest-earned ratio). Also, the financial information needed is listed on the right. Thank you so so much, really struggling with this concept.
Consider the following income statement for Larry & Harry drug stores: Revenue - 90mm Variable costs- 48mm Interest on debt- 6mm Depreciation- 0 mm It’s tax rate is 25% and the book value of its equity is 150mm. What is L&H’s coverage ratio? A) 0.18 B) 5.25 C) 6 D) 7 E) 8 F)15
Dallas Company's current ratio is 4 to 3. The company is negotiating a loan, and the company's management understands that a higher (i.e., better) current ratio will reduce the company's cost of borrowing (interest rate). Which of the following transactions will improve Houston Company's current ratio? Select one: a. making a payment on a long-term debt b. using cash to pay current liabilities c. purchasing inventory on account d. collecting on some of the company's accounts receivable e. none of the above
To illustrate the effects of financial leverage for PizzaPalace’s management, consider two hypothetical firms: Firm U (which uses no debt financing) and Firm L (which uses $4,000 of 8% interest rate debt). Both firms have $20,000 in net operating capital, a 25% tax rate, and an expected EBIT of $2,400. (1) Construct partial income statements, which start with EBIT, for the two firms. (2) Calculate NOPAT, ROIC, and ROE for both firms. (3) What does this example illustrate about the impact of financial leverage on ROE? (4) Why did leverage increase ROE in this example?
Taking the corporate taxes into account, if there is no possibility of financial distress, a firm can maximize its market value when the: firm uses a debt-equity ratio of 1.0. firm uses the maximum amount of debt in its capital structure. firm uses no debt in its capital structure. corporate tax rate approaches 100%.
B.F. Pierce & Company is considering changing its capital structure. The company currently has no debt and no preferred stock, but it would like to add some debt to take advantage of low interest rates and the tax shield. Its investment banker has indicated that the pre-tax cost of debt under various possible capital structures would be as follows: 8.66% 9.21% 8.83% Market Debt-to- Value Ratio 9.07% (WD) 0.00 0.20 0.40 0.60 0.80 Market Equity-to- Value Ratio (WE) 1.00 0.80 0.60 0.40 0.20 Market Debt-to- Equity Ratio (D/E) 0.00 0.25 0.67 1.50 4.00 Before-Tax Cost of Debt (rD) 5.00% The company uses the CAPM to estimate its cost of common equity. Currently the risk-free rate is 4%, the market risk premium is 6%, and the company's tax rate is 25%. The company estimates that its beta now (which is unlevered because it currently has no debt) is 0.8. Based on this information, what is the firm's weighted average cost of capital at its optimal capital structure? 6.00% 7.00% 8.00% 9.00%
Please show proper steps thanks. All parts.
Alpha Co. has a debt-equity ratio of 0.6, a pretax cost of debt of 7.5 percent, and an unlevered cost of equity of 12 percent. What is Alpha's cost of equity if you ignore taxes? Multiple choice question. 16.5% 9.3% 14.7% 12% Explain why
only looking for parts c-1 and c-3
Dollar General (DG) is choosing between financing itself with only equity or with debt and equity. Regardless of how it finances itself, the EBIT for DG will be $545.63 million. If DG does use debt, the interest expense will be $57.85 million. If DG‘s corporate tax rate is 0.30, how much will DG pay (in millions) in total to ALL investors if it uses both debt and equity? Instruction: Type ONLY your numerical answer in the unit of millions
You have the following information about two firms, Debt Free, Incorporated and Debt Spree, Incorporated. Both firms have the same prospects for sales and EBIT, and both have the same level of assets, tax rate and borrowing rate. They differ in their use of debt financing. Scenario Sales EBIT Bad year $ 200 $ 16 Normal year $ 275 $ 36 Good year $ 380 $ 52 Debt Free Debt Spree Total assets $ 250 $ 250 Tax rate 21% 21% Debt $ 0 $ 150 Equity $ 250 $ 100 Borrowing rate 16% 16% Required: a. Calculate the interest expense for each firm: Interest expense for Debt Free = $ Interest expense for Debt Spree = $ b. Calculate the following items for each firm for each scenario (bad year, normal year, good year): return on assets (ROA), net profit, and return on equity (ROE). (Use a minus sign to indicate negative answers. Round your answers to 2 decimal places.) Debt Free Debt Spree Scenario ROA Net Profit ROE ROA Net Profit ROE Bad…
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