Last year Hamdi Corp. had sales of $500,000, operating costs of $450,000, and ye

Question

Last year Hamdi Corp. had sales of $500,000, operating costs of $450,000, and year-end assets of $355,000. The debt-to-total-assets ratio was 17%, the interest rate on the debt was 7.5%, and the firm's tax rate was 35%. The new CFO wants to see how the ROE would have been affected if the firm had used a 50% debt ratio. Assume that sales, operating costs, total assets, and the tax rate would not be affected, but the interest rate would rise to 8.0%. By how much would the ROE change in response to the change in the capital structure? Question 27 options:
A. 3.17%
B. 3.42%
C. 3.48%
D. 3.08%
E. 2.99%
Please show your work. Last year Hamdi Corp. had sales of $500,000, operating costs of $450,000, and year-end assets of $355,000. The debt-to-total-assets ratio was 17%, the interest rate on the debt was 7.5%, and the firm's tax rate was 35%. The new CFO wants to see how the ROE would have been affected if the firm had used a 50% debt ratio. Assume that sales, operating costs, total assets, and the tax rate would not be affected, but the interest rate would rise to 8.0%. By how much would the ROE change in response to the change in the capital structure? Last year Hamdi Corp. had sales of $500,000, operating costs of $450,000, and year-end assets of $355,000. The debt-to-total-assets ratio was 17%, the interest rate on the debt was 7.5%, and the firm's tax rate was 35%. The new CFO wants to see how the ROE would have been affected if the firm had used a 50% debt ratio. Assume that sales, operating costs, total assets, and the tax rate would not be affected, but the interest rate would rise to 8.0%. By how much would the ROE change in response to the change in the capital structure?
A. 3.17%
B. 3.42%
C. 3.48%
D. 3.08%
E. 2.99%
A. 3.17% B. 3.42% C. 3.48% D. 3.08% E. 2.99% Please show your work.
A. 3.17%
B. 3.42%
C. 3.48%
D. 3.08%
E. 2.99%

Explanation / Answer

sales=500000-450000=50000

profit=50000

step1= debt/total asset=17%

debt=17*355000=60350

equity=355000-60350=294650

intereat on debt=60350*7.5/100=4526

profir=50000-4526=45474-(45474*35/100)=29558

ROE=29558/294650=0.100

step 2   debt=355000*50/100=177500

so,equity=355000-177500=177500

interest on debt=177500*8/100=14200

profit=50000-14200=35800-(35800835/100)=232700

ROE=9232700/177500)=0.13

change in equity=(0.1003-0.13)*100=2.99%

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