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Chrome File Edit View History Bookmarks People Window Help 100% Sun 3:50 AM Student Center Assignments-2017 Fall Term New Tab 5 You > C Secure https://bbhosted.cuny.edu/webapps/blackboard/content/listContent.jsp?course_id=-1447951-1&content;_id_-30459492-1&mode-...; AppsSuggested Sites Imported From IE Google Earth Student Center CChegg Study | Guid... Middle East News-f Homeo New Tab Lehman College Consider the following data: led An organization is planning to invest $500,000 in assets to begin operations. It pays taxes at a 30% rate. The organization plans to finance 10% of debt to acquire its assets, with an interest rate of 10%. Revenues are an estimated $250,000. Operating costs are also anticipated to be $120,000. Construct a P&L; statement using the above data to determine the impact the new capital structure would have on profit, dollar return and equity. Indicate the optimal choice for investors based on the ROE. All Equity Total? 796 Debt Equity ? Financed Total $? ALL EQUITY ?%DEBT Line 1 Line 2 Line 3 Operating Costs Operating Income 12Explanation / Answer
Calculation of portion of Debt and equity in total investment.
Total Investment = $500,000
Debt = 10% of Investment = $50,000
Equity = 90% of the Investment = $450,000
Calculation of ROE under both situations
Particulars
All Equity
10% Debt
Revenues
250,000
250,000
Operating Costs
120,000
120,000
Operating Income
130,000
130,000
Interest Expense (10% of $50,000)
0
5,000
Taxable Income
130,000
125,000
Taxes (30%)
39,000
37,500
Profit
91,000
87,500
Return Dollar Amount
0.182
0.175
Return on Equity
91,000 / 500,000 = 18.2%
87,500 / 450,000 = 19.44%
Particulars
All Equity
10% Debt
Revenues
250,000
250,000
Operating Costs
120,000
120,000
Operating Income
130,000
130,000
Interest Expense (10% of $50,000)
0
5,000
Taxable Income
130,000
125,000
Taxes (30%)
39,000
37,500
Profit
91,000
87,500
Return Dollar Amount
0.182
0.175
Return on Equity
91,000 / 500,000 = 18.2%
87,500 / 450,000 = 19.44%
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