You work for the CEO of a new company that plans to manufacture and sell a new product, a watch that has an embedded TV set and a magnifying glass crystal. The Issu how to finance the company, with only equity or with a m and equity. Expected operating Income is P400,000. Oth for the firm are shown below. How much higher or lower firm's expected ROE be if it uses some debt rather than al Le., what is ROEL - ROEU? 0% Debt, U 60% Debt, L Oper. Income (EBIT) P 400,000 P 400,000 Required investment P2,500,000 P 2,500,000 % Debt 0.0% 60.0% P of Debt P 0.00 P1,500,000 P of Common equity P2,500,000 P1,000,000 Interest rate ΝΑ 10.00% Tax rate 35% 35% 6.14% O 6.45% O 5.85 % O 6.77%
You work for the CEO of a new company that plans to manufacture and sell a new product, a watch that has an embedded TV set and a magnifying glass crystal. The Issu how to finance the company, with only equity or with a m and equity. Expected operating Income is P400,000. Oth for the firm are shown below. How much higher or lower firm's expected ROE be if it uses some debt rather than al Le., what is ROEL - ROEU? 0% Debt, U 60% Debt, L Oper. Income (EBIT) P 400,000 P 400,000 Required investment P2,500,000 P 2,500,000 % Debt 0.0% 60.0% P of Debt P 0.00 P1,500,000 P of Common equity P2,500,000 P1,000,000 Interest rate ΝΑ 10.00% Tax rate 35% 35% 6.14% O 6.45% O 5.85 % O 6.77%
Chapter1: Taking Risks And Making Profits Within The Dynamic Business Environment
Section: Chapter Questions
Problem 1CE
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Transcribed Image Text:You work for the CEO of a new company that plans to
manufacture and sell a new product, a watch that has an
embedded TV set and a magnifying glass crystal. The issue now is
how to finance the company, with only equity or with a mix of debt
and equity. Expected operating Income is P400,000. Other data
for the firm are shown below. How much higher or lower will the
firm's expected ROE be if it uses some debt rather than all equity,
L.e., what is ROEL - ROEU?
0% Debt, U
60% Debt, L
Oper. Income (EBIT)
P 400,000
P 400,000
Required investment
P2,500,000
P 2,500,000
% Debt
0.0%
60.0%
P of Debt
P 0.00
P1,500,000
P of Common equity
P2,500,000
P1,000,000
Interest rate
ΝΑ
10.00%
Tax rate
35%
35%
O 6.14%
O 6.45 %
O 5.85 %
O 6.77 %
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