Why is leverage sometimes called a two edged sword

Reference no: EM131920635

Problem

Mr. Agirich has provided the following information and ratios for the Aggie Farms 20X0 operations: Average Total Assets = $840,000 Average Total Liabilities = $395,000 Net Farm Income before taxes = $ 74,800 Interest Paid and accrued = $ 26,000 Income Taxes Paid = $ 9,000 Based on this information, what is the projected Rate of Return on Equity after taxes, re, for Aggie Farms in 20X1? (Assume that the tax rate, t, is 15% and the Rate of Return on Assets before taxes, ra, will continue as reflected for 20X0 and that the future cost of debt, i, will be 10%. Use the equation presented in class to calculate the projected re. Use the information above to calculate ra. Remember that Net Farm Income before taxes is from the Income statement and is after interest. What might Mr. Agirich do to increase the rate of return on equity after taxes? What is the projected re for Aggie Farms in 20X1, if Mr. Agirich projects ra to be 5%? Keep everything else the same as before. Mr. Agirich feels he needs to increase re to 13.6%. If he cannot increase return on assets nor decrease interest cost or the tax rate, how much additional debt will he need to incur to achieve the desired rate level of profitablilty Suppose Mr. Agirich borrows the additional money (problem 4). What is the projected re for Aggie Farms for 20X1, if Mr. Agirich projects the ra to be 5%? Keep everything else the same. Why is leverage sometimes called a two edged sword?

Reference no: EM131920635

Questions Cloud

Describe any factors that could skew your results : Describe any factors that could skew your results. In other words, explain if there is one method of costing that could make a product look more favorable.

What is the probability that a packet received correctly : What is the probability that a packet and the corresponding acknowledgment are received correctly (referred to as "packet success rate" ps)?

Calculate throughput expressed in terms of useful data bits : Calculate the throughput expressed in terms of useful data bits transmitted per second for SW-ARQ and SR-ARQ. Why is SW-ARQ so inefficient?

Compute their income tax refund : Mr. and Mrs. K's AGI (earned income) was $14,610. Their federal income tax withholding was $850. Compute their income tax refund.

Why is leverage sometimes called a two edged sword : Mr. Agirich has provided the following information and ratios for the Aggie Farms 20X0 operations. Why is leverage sometimes called a two edged sword?

Compute the normalized throughput for the case : Compute a new window size so that the channel pipe is entirely filled with transmitted PDUs and compute the normalized throughput for this case.

What is the value of mr ashs estate : Mr. Ash died on June 15 of the previous year. The assets in his estate were valued on his date of death. What is the value of Mr. Ash's estate?

What percentage of the batteries would you expect to fail : Auto batteries have an average life of 2.9 years. Battery life is normally distributed with a mean of 2.9 years and a standard deviation of 0.48 year.

Calculate the average service time for a given PDU : Calculate the average service time for a given PDU entering the ARQ system. (Hint: the transmitter's queue can be modeled using the M/G/1 theory.)

User Account

All Pages