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Unformatted text preview: change in sales will have no effect on the company’s tax rate.) A. 42.50% B. 35.00% C. 40.00% D. 32.50% E. 37.50% 37. Assume that Firm A is an allequity firm with total assets of $1,000 and the following distribution of EBIT for the coming year: Economy Firm A (Unlevered) Bad Average Good Probability 30% 40% 30% EBIT $120 $150 $180 Interest $0 $0 $0 EBT $120 $150 $180 Taxes (40%) $48 $60 $72 Net Income $72 $90 $108 BEP 12.0% 15.0% 18.0% ROA 7.2% 9.0% 10.8% ROE 7.2% 9.0% 10.8% As you can calculate, the standard deviation of the ROE distribution is 1.39 percent. Now assume that the firm plans to issue $400 of debt, at an interest rate of 10 percent, and use the proceeds to repurchase equity (you may ignore potential impacts on price and assume that the firm will then have $600 of equity). Determine the standard deviation of the new ROE distribution if the firm does issue this debt....
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.
 Spring '08
 Staff
 Leverage

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