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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 beforetax 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 longrun
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%
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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
 Debt, Return On Equity (ROE)

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