Suppose Kosh Corporation is considering a project that will require $400,000 in

Question

Suppose Kosh Corporation is considering a project that will require $400,000 in assets.

-The project is expected to produce an EBIT of $55,000

-The project will be financed with 100% equity

- Common equity outstanding will be 30,000 shares

- The company faces a tax rate of 30%

1. Using the preceding information, what will Kosh corporation's reutrn on equity (ROE) be for this project?

a. 9.63%

b. 11.56%

c. 11.07%

d. 7.70%

2. Kosh Corporation's earnings per share (EPS) will be _______________ if it finances this project with 100% equity.

a. $1.28

b. $0.90

c. $0.96

d. $1.09

e. $1.02

3. Kosh corpation's CFO is also considering financing this project with 50% debt and 50$ equity. The interest rate on the company's debt will be 11%. Because the company will finance only 50% of the project with equity, it will have only 15,000 shares outstanding. What will the ROE be on this project if the company decides to finance the project with 50% debt and 50% equity?

a. 10.97%

b. 11.55%

c. 9.82%

d. 12.13%

4. Kosh corporation's EPS will be _________if it finances this project with 50% equty and 50% debt.

a. $1.85

b. $1.62

c. $1.54

d. $1.45

5. When a firm uses debt, this _______________ the business risk placed on common stockholders

a. inceases

b. decreases

Explanation / Answer

1 a 9.63% Statement showing computation   Particulars Amount EBIT                 55,000.00 Tax @30%                 16,500.00 EAT                 38,500.00 Equity = Assets                 400,000.00 Retiurn on Equity = EAT/Equity * 100 9.63% 2) EPS = a 1.28 EAT                 38,500.00 No of shares                 30,000.00 EPS= EAT/No of shares                            1.28 3 b 11.55% Statement showing computation   Particulars Amount EBIT                 55,000.00 Interest(200,000*11%)                 22,000.00 EBT                 33,000.00 Tax @30%                    9,900.00 EAT                 23,100.00 Equity = 50% of Assets                 200,000.00 Retiurn on Equity = EAT/Equity * 100 11.55% 4) EPS = c 1.54 EAT                 23,100.00 No of shares                 15,000.00 EPS= EAT/No of shares                            1.54 5) a increases

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