Financial Statements, Cash Flow, and Taxes8

Financial - 59 Assume that an all equity firm has assets of $20,000 and a return on assets(ROA of 13.00 percent And that the firm mak es the

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Page 38 of 44 Pages 59. Assume that an all equity firm has assets of $20,000 and a return on assets (ROA) of 13.00 percent. And that the firm makes the decision to replace 1/2 of its equity with debt that has a before-tax cost of 8 percent Assuming that the firm’s tax rate is 40 percent, calculate the firm’s ROE after the debt has been issued and equity has been repurchased. (HINT: Think about leverage and tax shelter effects of using debt that we demonstrated in class.) A. 20.20% B. 21.70% C. 20.70% D. 22.20% E. 21.20% 60. Assume that in 2006 (today) a firm had EBIT of $9,000,000, a tax rate of 40 percent, and that the firm’s total invested capital could be defined as $20,450,000 (consisting of $8,000,000 of debt and $12,450,000 of equity), and that its weighted average cost of capital is 12 percent. (Hint: you should now be able to calculate economic value added (EVA) for 2006.) Now assume that EVA is expected to grow at a long-run sustainable growth rate of 4 percent each year. Given this information, determine the present value today (2006) of all future EVAs to be earned by the firm. A. $38,161,000 B. $38,572,000 C. $38,298,000 D. $38,709,000 E. $38,435,000 61. Assume that your company is 60 percent equity financed (40 percent debt financed). Given the following information, calculate the return on equity (ROE). Data Amount EBIT $6,000 Sales $35,000 Interest Rate 0.06 Dividend payout ratio 40% Total assets turnover 0.70 x Tax rate 40% A. 9.20% B. 9.50% C. 9.40% D. 9.30%
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

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.

Page1 / 4

Financial - 59 Assume that an all equity firm has assets of $20,000 and a return on assets(ROA of 13.00 percent And that the firm mak es the

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online