Assume that Firm A is an all-equity firm with total assets of $5,000 and the following...
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Assume that Firm A is an all-equity firm with total assets of $5,000 and the following distribution of EBIT for the coming year: Firm A Unlevered Bad Economy Average Good Probability 30.00% 40.00% 30.00% EBIT $500.00 $700.00 $900.00 Interest $0.00 $0.00 $0.00 EBT $500.00 $700.00 $900.00 Taxes (40%) -$200.00 $280.00 -$360.00 Net Income $300.00 $420.00 $540.00 BEP 10.00% 14.00% 18.00% ROA 6.00% 8.40% 10.80% ROE 6.00% 8.40% 10.80% Now assume that the firm plans to issue $2,000 of debt, at an interest rate of 6.4 percent, and use the proceeds to repurchase equity (you may ignore potential impacts on price and assume that the firm will then have $3,000 of equity). Given this information, determine the standard deviation of the new ROE distribution. Assume that Firm A is an all-equity firm with total assets of $5,000 and the following distribution of EBIT for the coming year: Firm A Unlevered Bad Economy Average Good Probability 30.00% 40.00% 30.00% EBIT $500.00 $700.00 $900.00 Interest $0.00 $0.00 $0.00 EBT $500.00 $700.00 $900.00 Taxes (40%) -$200.00 $280.00 -$360.00 Net Income $300.00 $420.00 $540.00 BEP 10.00% 14.00% 18.00% ROA 6.00% 8.40% 10.80% ROE 6.00% 8.40% 10.80% Now assume that the firm plans to issue $2,000 of debt, at an interest rate of 6.4 percent, and use the proceeds to repurchase equity (you may ignore potential impacts on price and assume that the firm will then have $3,000 of equity). Given this information, determine the standard deviation of the new ROE distribution.
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To determine the standard deviation of the new ROE distribution after Firm A issues 2000 of debt and ... View the full answer
Related Book For
Financial and Managerial Accounting
ISBN: 978-0132497978
3rd Edition
Authors: Horngren, Harrison, Oliver
Posted Date:
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