Aero Company is able to earn a 12% return on assets. The Company can issue bonds

Question

Aero Company is able to earn a 12% return on assets. The Company can issue bonds that have an 8% interest rate. On January 1, Year 3 the company had assets and stockholders’ equity of $20,000. Also, on January 1, Year 3 the company issued $10,000 of bonds and invested the proceeds. As a result of financial leverage, the return on equity at the end of Year 3 will Aero Company is able to earn a 12% return on assets. The Company can issue bonds that have an 8% interest rate. On January 1, Year 3 the company had assets and stockholders’ equity of $20,000. Also, on January 1, Year 3 the company issued $10,000 of bonds and invested the proceeds. As a result of financial leverage, the return on equity at the end of Year 3 will Aero Company is able to earn a 12% return on assets. The Company can issue bonds that have an 8% interest rate. On January 1, Year 3 the company had assets and stockholders’ equity of $20,000. Also, on January 1, Year 3 the company issued $10,000 of bonds and invested the proceeds. As a result of financial leverage, the return on equity at the end of Year 3 will

Explanation / Answer

Ke 12%               20,000 Kd 8%               10,000 Total Assets in begning of year 3          30,000 Return at 12% at the end year 3            3,600 Less: Interest 10000*8%                800 Earnning available to shareholders            2,800 Equity          20,000 Return on equity=2800/20000 14% Since tax rate not given assume no taxes

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