Consider the following case: Newtown Propane ís considering a project that will

Question

Consider the following case: Newtown Propane ís considering a project that will require $500,000 in assets. The project will be financed with 100% equity. The company faces a tax rate of 30%. What will be the ROE (return on equity) for this project if it produces an EBIT (earnings before interest and taxes) of $155,000 21.7% 14.1% 17.4% 22.8% Determine what the project's ROE will be if its EBIT is -$60,000. When calculating the tax effects, assume that Newtown Propane as a whole will.have a large, positive income this year 0-67% O-9.2% -8.4% 0-80% Newtown Propane is also considering financing the project with 50% equity and 50% debt. The interest rate on the company's debt will be 10%, what will be the project's ROE if it produces an EBIT of $155,000? 36.4% 27.3% 38.2% 41.9% what will be the project's ROE if it produces an EBIT of-$60,000 and it finances 50% of the project with equity and 50% with debt? When calculating the tax effects, assume that Newtown Propane as a whole will have a large, positive income this year. -21.4% O-30.9% -25.0% -23.8% The use of financial leverage consequently the expected ROE the probability of a large loss, and the risk borne by stockholders. The greater the firm's chance of bankruptcy, the its optimal debt ratio will be. manager is more likely to use debt in an e boost profits.

Explanation / Answer

In CAse 3 and 4 debit is 50% = 500000*50% = 250000

then intt on debt is 250000*10% = 25000

Case 1 Case 2 Case 3 Case 4 EBIT 155000 -60000 155000 -60000 Less :- Intt 0 0 25000 25000 EBT 155000 -60000 130000 -85000 Less :- tax 46500 -18000 39000 -25500 EAT 108500 -42000 91000 -59500 equity 500000 500000 250000 250000 ROE 21.70% -8.40% 36.40% -23.80% Answer A C A D

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.