Fundamentals of Financial Management, Concise Edition (MindTap Course List)
9th Edition
ISBN: 9781305635937
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Chapter 4, Problem 14P
Summary Introduction
To determine:
Return on Equity:
Return on equity represents the amount of return earned by the equity shareholders. It can be calculated by dividing earnings available for equity shareholders to total equity capital.
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Remex (RMX) currently has no debt in its capital structure. The beta of its equity is
1.44.
For each year into the indefinite future, Remex's free cash flow is expected to equal
$26
million. Remex is considering changing its capital structure by issuing debt and using the proceeds to buy back stock. It will do so in such a way that it will have a
25%
debt-equity ratio after the change, and it will maintain this debt-equity ratio forever. Assume that Remex's debt cost of capital will be
6.37%.
Remex faces a corporate tax rate of
15%.
Except for the corporate tax rate of
15%,
there are no market imperfections. Assume that the CAPM holds, the risk-free rate of interest is
4.9%,
and the expected return on the market is
10.78%.
a. Using the information provided, fill in the table below.
b. Using the information provided and your calculations in part
(a),
determine the value of the tax shield acquired by Remex if it changes its capital structure in the way it is…
Remex (RMX) currently has no debt in its capital structure. The beta of its equity is 1.42. For each year into the indefinite future, Remex's free cash flow is expected to equal $28 million. Remex is considering changing its capital structure by issuing debt and using the proceeds to buy back stock. It will
do so in such a way that it will have a 28% debt-equity ratio after the change, and it will maintain this debt-equity ratio forever. Assume that Remex's debt cost of capital will be 6.11%. Remex faces a corporate tax rate of 15%. Except for the corporate tax rate of 15%, there are no market imperfections.
Assume that the CAPM holds, the risk-free rate of interest is 4.7%, and the expected return on the market is 10.34%.
a. Using the information provided, fill in the table below.
b. Using the information provided and your calculations in part (a), determine the value of the tax shield acquired by Remex if it changes its capital structure in the way it is considering.
a. Using the…
Chapter 4 Solutions
Fundamentals of Financial Management, Concise Edition (MindTap Course List)
Ch. 4 - Financial ratio analysis is conducted by three...Ch. 4 - Prob. 2QCh. 4 - Over the past year, M.D. Ryngaert Co. had an...Ch. 4 - Profit margins and turnover ratios vary from one...Ch. 4 - How does inflation distort ratio analysis...Ch. 4 - Prob. 6QCh. 4 - Give some examples that illustrate how (a)...Ch. 4 - Why is it sometimes misleading to compare a...Ch. 4 - Suppose you were comparing a discount merchandiser...Ch. 4 - Prob. 10Q
Ch. 4 - Differentiate between ROE and ROIC.Ch. 4 - Indicate the effects of the transactions listed in...Ch. 4 - DAYS SALES OUTSTANDING Baxley Brothers has a DSO...Ch. 4 - DEBT TO CAPITAL RATIO Kayes Kitchenware has a...Ch. 4 - DuPONT ANALYSIS Hendersons Hardware has an ROA of...Ch. 4 - MARKET/BOOK RATIO Edelman Engines has 17 billion...Ch. 4 - PRICE/EARNINGS RATIO A company has an EPS of 2.40,...Ch. 4 - DuPONT AND ROE A firm has a profit margin of 3%...Ch. 4 - Prob. 7PCh. 4 - DuPONT AND NET INCOME Precious Metal Mining has 17...Ch. 4 - BEP, ROE, AND ROIC Broward Manufacturing recently...Ch. 4 - M/B AND SHARE PRICE You are given the following...Ch. 4 - RATIO CALCULATIONS Assume the following...Ch. 4 - Prob. 12PCh. 4 - TIE AND ROIC RATIOS The W.C. Pruett Corp. has...Ch. 4 - Prob. 14PCh. 4 - RETURN ON EQUITY AND QUICK RATIO Lloyd Inc. has...Ch. 4 - Prob. 16PCh. 4 - CONCEPTUAL: RETURN ON EQUITY Which of the...Ch. 4 - TIE RATIO MPI Incorporated has 6 billion in...Ch. 4 - CURRENT RATIO The Stewart Company has 2,392,500 in...Ch. 4 - DSO AND ACCOUNTS RECEIVABLE Ingraham Inc....Ch. 4 - Prob. 21PCh. 4 - Prob. 22PCh. 4 - RATIO ANALYSIS Data for Barry Computer Co. and its...Ch. 4 - DuPONT ANALYSIS A firm has been experiencing low...Ch. 4 - RATIO ANALYSIS The Corrigan Corporations 2015 and...Ch. 4 - Prob. 1DQCh. 4 - Prob. 2DQCh. 4 - Looking at Morningstars Profitability ratios, what...Ch. 4 - Prob. 4DQCh. 4 - Prob. 5DQCh. 4 - From the Google Finance site, look at Hewlett...Ch. 4 - From the Google Finance site, use the DuPont...Ch. 4 - Prob. 8DQ
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