Calculate return on equity and earnings per share

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Reference no: EM131923704

Airplane Company has a cost-plus-fixed fee contract with the air force to build jets. The government will buy any additional equipment that it needs on a justified cost-savings basis. The incremental tax rate for the company is 40%. The company has computed the following labor savings for a new equipment that costs $18334:

Period 1 Period 2

Before Tax $10,000 $10,000

After Tax $6,000 $6,000

1. The company has an after-tax time value of money of 6% and the federal government has a before-tax time value of money of 5%. Should the equipment be purchased?

A COMPANY-NO; GOVT-YES

B INDETERMINATE

C COMPANY-YES; GOVT-NO

D COMPANY-YES; GOVT-YES

E COMPANY-NO; GOVT-NO

2. Calculate return on equity (ROE) and earnings per share (EPS) if expansion is financed by equity.

A 23.76%; $2.38

B 22%; $2.2

C 29.7%; $2.97

D 25.08%; $2.51

E 33%; $3.3

3. Calculate return on equity (ROE) and earnings per share (EPS) if expansion is financed by debt.

A 22%; $2.2

B 23.76%; $2.38

C 33%; $3.3

D 29.7%; $2.97

E 25.08%; $2.51

4. Calculate return on equity (ROE) and earnings per share (EPS) if expansion is financed by equity and debt equally.

A 25.08%; $2.51

B 22%; $2.2

C 29.7%; $2.97

D 33%; $3.3

E 23.76%; $2.38

Reference no: EM131923704

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