Lorp the hurdle rate for all projects under consideration? Explain 13.10 For any

Q: Lorp the hurdle rate for all projects under consideration? Explain 13.10 For any

a. b. c. (20% x 500,000) + (20% x 150,000) + (20% x 1000,000) EBIT =$ 150,000 ROE= 150,000/500,000 = 0.3 ROE =30% d. Please Rate or comment if you have any doubt regarding this solution. Balance sheet All equity 50% debt Cuttent assets 5,000,000 5,000,000 Fixed assets 0 0 Total assets 5,000,000 5,000,000 Bank loan (8% cost) 0 2,500,000 Common stock 5,000,000 2,500,000 Total liability and equity 5,000,000 5,000,000

ID: 2582093 • Letter: L

Question

Lorp the hurdle rate for all projects under consideration? Explain 13.10 For any given firm, n as answer Problems 13.1 Seattle Health Plans currently uses zero-debt financing. Its operati income (EBIT) is SI million, and it pays taxes at a 40 percent rate. It has $5 million in assets and, because it is all -equity financed million in equity. Suppose the firm is considering replacing half its equity financing with debt financing bearing an interest rate of percent. a. What impact would the new capital structure have on the firm's net of 8 income, total dollar return to investors, and ROE b. Redo the analysis, but now assume that the debt financing would cost 15 percent. c. Return to the initial 8 percent interest rate. Now, assume that EBIT could be as low as $500,000 (with a probability of 20 percent) or as high as S1.5 million (with a probability of 20 percent). There remains a 60 percent chance that EBIT would be $1 million. Redo the analysis for each level of EBIT, and find the expected values for the firm's net income, total dollar return to investors, and ROB What lesson about capital structure and risk does this illustration provide? d. Repeat the analysis required for Part a, but now assume that Se attle Health Plans is a not-for-profit corporation and pays no taxes. Compare the results with those obtained in Part a.

Explanation / Answer

(20% x 500,000) + (20% x 150,000) + (20% x 1000,000)

EBIT =$ 150,000

ROE= 150,000/500,000 = 0.3

ROE =30%

Please Rate or comment if you have any doubt regarding this solution.

Balance sheet All equity 50% debt Cuttent assets 5,000,000 5,000,000 Fixed assets 0 0 Total assets 5,000,000 5,000,000 Bank loan (8% cost) 0 2,500,000 Common stock 5,000,000 2,500,000 Total liability and equity 5,000,000 5,000,000

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Lorp the hurdle rate for all projects under consideration? Explain 13.10 For any

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