Perseverance Corporation is deciding whether to pursue a restricted or relaxed current investment policy. The firm's annual sales are expected to total P3,600,000, its fixed a turnover ratio equals 4.0, and its debt and common equity are each 50% of total assets. is P150,000, the interest rate on the firm's debt is 10%, and the tax rate is 40%. If the com follows a restricted policy, its total assets turnover will be 2.5. Under a relaxed policy its assets turnover will be 2.2. What's the difference in the projected ROES under the restricted and relaxed policies? [R
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- The Berndt Corporation expects to have sales of 12 million. Costs other than depreciation are expected to be 75% of sales, and depreciation is expected to be 1.5 million. All sales revenues will be collected in cash, and costs other than depreciation must be paid for during the year. Berndts federal-plus-state tax rate is 40%. Berndt has no debt. a. Set up an income statement. What is Berndts expected net income? Its expected net cash flow? b. Suppose Congress changed the tax laws so that Berndts depreciation expenses doubled. No changes in operations occurred. What would happen to reported profit and to net cash flow? c. Now suppose that Congress changed the tax laws such that, instead of doubling Berndts depreciation, it was reduced by 50%. How would profit and net cash flow be affected? d. If this were your company, would you prefer Congress to cause your depreciation expense to be doubled or halved? Why?F Enterprises is evaluating whether to do a either a restricted or relaxed investment policy on current assets. The sales of F Enterprises for the year is P400,000 while fixed assets are P100,000. Debt represents half of the firm’s assets. The firm’s debt has an interest rate of 10%. The EBIT of F Enterprises is P36,000. The entity is subject to income tax rate of 40%. Using a restricted policy, current assets will account for 15% of sales while the relaxed policy will increase share of current assets to 25 percent of sales. What will be the variance between projected return on equity between restricted and the relaxed investment policy on current assets?Lux Co. is considering whether to pursue a restricted or relaxed current asset investment policy. The firm’s annual sales are P400,000; its fixed assets are P150,000; debt and equity are each 50 percent of total assets. EBIT is P36,000, the interest rate on the firm’s debt is 10 percent, and the firm’s tax rate is 40 percent. With a restricted policy, current assets will be 15 percent of sales. Under a relaxed policy, current assets will be 25 percent of sales. What is the difference in the projected ROEs between the restricted and relaxed policies?
- Bulldogs Inc. is considering whether to pursue a restricted or relaxed current asset investment policy. The firm’s annual sales are P500,000; its fixed assets are P200,000; debt and equity are each 50% of total assets. EBIT is P40,000, the interest rate on the firm’s debt is 10%, and the firm’s tax rate is 25%. Current assets will be 10% of sales with a restricted policy. Under a relaxed policy, current assets will be 20% of sales. What is the difference in the projected ROEs between the restricted and relaxed policies? 5.40% 3.57% 4.00% 3.20%Hardwig Inc. is considering whether to pursue a restricted or relaxed current asset investment policy. The firm's annual sales are expected to total $3,600,000, its fixed assets turnover ratio equals 4.0, and its debt and common equity are each 50% of total assets. EBIT is $150,000, the interest rate on the firm's debt is 10%, and the tax rate is 40%. If the company follows a restricted policy, its total assets turnover will be 2.5. Under a relaxed policy its total assets turnover will be 2.2. Refer to the data for Hardwig, Inc.Assume now that the company believes that if it adopts a restricted policy, its sales will fall by 15% and EBIT will fall by 10%, but its total assets turnover, debt ratio, interest rate, and tax rate will all remain the same. In this situation, what's the difference between the projected ROEs under the restricted and relaxed policies?National Co. is considering whether to pursue a restricted or relaxed current asset investment policy. The firm’s annual sales are P400,000; its fixed assets are P150,000; debt and equity are each 50 percent of total assets. EBIT is P36,000, the interest rate on the firm’s debt is 10 percent, and the firm’s tax rate is 40 percent. With a restricted policy, current assets will be 15 percent of sales. Under a relaxed policy, current assets will be 25 percent of sales. What is the difference in the projected ROEs between the restricted and relaxed policies?
- You have the following data for your company. Market Value of Equity: $520 Book Value of Debt: $130 Required rate of return on equity: 12% Required rate of return on debt (pre-tax): 7% Corporate tax rate: 25% The company's debt is assumed to be is reasonably safe, so the book value of debt is a reasonably approximation for the market value of debt. What is the weighted average cost of capital for this company?Referring to table below, calculate the market value of firm L (without a corporate income tax) if the equity amount in its capital structure decreases to $5,000 and the debt amount increases to $5,000. At this capital structure, the cost of equity is 15 percent. Round your answer to the nearest dollar. Firm U Firm L Net operating income (EBIT) $ 1,000 $ 1,000 Less: Interest payments to debt holders, I - 100 Income available to stockholders (dividends), D $ 1,000 $ 900 Total income available to security holders, I + D $ 1,000 $ 1,000 Required rate of return on debt, kd - 5 % Market value of debt, B = I/kd - $ 2,000 Required rate of return on equity,ke 10 % 11.25 % Market value of equity, E = D/ke $ 10,000 $ 8,000 Market value of firm, E + B $ 10,000 $ 10,000 $u are given the following information concerning a firm: sets required for operation: $5,700,000 evenues: $8,600,000 berating expenses: $8,100,000 come tax rate: 40%. anagement faces three possible combinations of financing: 1. 100% equity financing 2. 35% debt financing with a 5% interest rate 3. 70% debt financing with a 5% interest rate a. What is the net income for each combination of debt and equity financing? Round your answers to the nearest dollar. 1 Net income $ 2 3 $ b. What is the return on equity for each combination of debt and equity financing? Round your answers to one decimal place. Return on equity 1 2 3 % % % c. If the interest rate had been 10 percent instead of 5 percent, what would be the return on equity for each combination of debt and equity financing? Round your answers to one decimal place. Return on equity 1 2 3 % % % d. What is the implication of the use of financial leverage when interest rates change? The use of financial leverage is likely to -Select- the…
- Ben Corporation is deciding whether to pursue a restricted or relaxed working capital investment policy. The firm's annual sales are expected to total $2,400,000, its fixed assets turnover ratio equals 3.0, and its debt and common equity are each 50% of total assets which is composed of fixed and current assets. EBIT is $130,000, the interest rate on the firm's debt is 8%, and the tax rate is 30%. If the company follows a restricted policy, its total assets turnover will be 2.4. Under a relaxed policy its total assets turnover will be 2.0. a. What is the projected ROE under the relaxed policy? b. TIE ratio under relaxed policyWidgets Inc has an expected EBIT of $64,000 in perpetuity and a tax rate of 35 percent. The firm has$95,000 in outstanding debt at an interest rate of 8.5 percent, and its unlevered cost of capital is 15percent. What is the value of the firm according to M&M Proposition I with taxes? Should the companychange its debt–equity ratio if the goal is to maximize the value of the firm? Explain.Lany Corporation is deciding whether to pursue a restricted or relaxed working capital investment policy. The firm’s annual sales are expected to total 2,400,000 its fixed asset turnover ratio equals 3.0, and its debt and common equity are each 50% of the total asset which is composed of fixed and current assets. EBIT is 130,000, the interest rate of the firm’s debt is 8%, and the tax rate is 30%. If the company follows a restricted policy, its total asset turnover will be 2.4. Under a relaxed policy its total asset turnover will be 2.0. How much would be the current assets under relaxed policy?