calculate the expected ROE for option 3 given an anticipated EBIT of 50,000,000

Case 3: Capital Budgeting, Capital Stru"ure, and the cost of Capital Company DEF has enjoyed several consecutive profitable years and has accumulated $80,000,000 in cash and marketable securities. The company is considering multiple potential uses for the excess cash. Option 1: Build a new manufacturing facility at an initial cost of $20,000,000. The facility is expected to generate an additional $7,000,000 in annual sales. Assume no new fixed costs and variable costs equal to 55% of sales. For depreciation calculations, assume a 10 year life and straight-line depreciation. Option 2: Use half of the current cash balance to repurchase shares of outstanding stock through a tender offer (4,000,000 shares at $10 per share). Option : Use half of the current cash balance to pay off long term debt. Option 4: Pay a special dividend of $4.00 per share Option : Increase the regular dividend to $4.00 per share. The company has 10,000,000 shares of stock outstanding that are currently priced at $10 per share. The company paid a dividend of $1.25 per share last year and expects dividends to grow at 4% annually. It also has 180,000 bonds outstanding that pay a 6% coupon rate and mature in 5 years. The current price of the bonds is $980. Assume semi-annual interest payments. The tax rate is 21% Hint: To calculate cash flows for years 1-10 CF = Sales - VC-DepEBIT - Taves = NI Dep HOCF Type here to search 3 2 a