Debt-to-total-assets ratios and interest rates on debt

Assignment Help Financial Management

Reference no: EM13768119

Firm AB and Firm YZ are identical except for their debt-to-total-assets ratios (D/TAs) and interest rates on debt. Each has $200,000 in assets, $40,000 EBIT, and a 40 percent marginal tax rate. Firm AB has a D/TA ratio of 40 percent and pays 7.5 percent interest on its debt, whereas YZ has a 60 percent interest on its debt and pays 10 percent interest on debt. Each firm has 5,000 shares of common stock outstanding. Calculate each firm's EPS and ROE (ROE = Net income/Equity). Discuss your results.

Reference no: EM13768119

Questions Cloud

Companys cost of equity capital : The Zombie Corporation’s common stock has a beta of 1.1. If the risk-free rate is 5.1 percent and the expected return on the market is 13 percent, what is the company’s cost of equity capital?

Degree of operating leverage : The CFO of Jupiter Jibs (JJ) expects this year's sales to be $2.5 million. EBIT is expected to be $1 million. The CFO knows that if sales actually turn out to be $2.3 million, JJ's EBT will be $888,000. What is JJ's degree of operating leverage (DOL)..

What is its sustainable growth rate : SGS Corp. has an ROE of 9 percent and a payout ratio of 17 percent. What is its sustainable growth rate? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

Cost of equity capital using both dividend capitalization : Tri-County Inc. pays an annual common stock dividend of $1.80 per share. The dividend has shown a constant growth rate over the past 5 years from $1.10 to its present level. This growth trend is expected to continue. The company's dividend payout rat..

Debt-to-total-assets ratios and interest rates on debt : Firm AB and Firm YZ are identical except for their debt-to-total-assets ratios (D/TAs) and interest rates on debt. Each has $200,000 in assets, $40,000 EBIT, and a 40 percent marginal tax rate. Firm AB has a D/TA ratio of 40 percent and pays 7.5 perc..

Both the cost of debt as the cost of equity : What is the impact of hedging on a firm’s overall cost of capital? Will it affect both the cost of debt as the cost of equity? Explain.

Firm is considering a new product development : Your firm is considering a new product development. an outlay of $90,000 is required for equipment, and an additional net working capital of $5000 is required. the project is expected to have a 4 year life, and the equipment will be depreciated on a ..

Holding a well-diversified portfolio of assets : Explain why a firm needs to hedge if stockholders are holding a well-diversified portfolio of assets?

What is the total cost at time zero of accepting : Your firm is considering a new product development. an outlay of $90,000 is required for equipment, and an additional net working capital of $5000 is required. the project is expected to have a 4 year life, and the equipment will be depreciated on a ..

User Account

All Pages