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Companies that use debt in their capital structure are said to be using finandal leverage. Using leverage can increase shareholder returns, but leverage also increases

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Companies that use debt in their capital structure are said to be using finandal leverage. Using leverage can increase shareholder returns, but leverage also increases the risk that shareholders bear. Consider the following case: Newtown Propane is a small company and is considering a project that will require 5650,000 in assets. The project will be financed with 100% equitt The company faces a tax rate of 25%. What will be the ROE (return on equity) for this project if it produces an EBrT (earnings before interest and taxes) of $155,000 ? 17.88% 13.41% 14.30% 19.67% Determine what the project's ROE will be if its EBIT is $55,000. When caiculating the tax effects, assume that Newtown Propane as a whole will have a large, positive income this year. Determine what the project's ROE will be if its EBIT is $55,000. When calculating the tax effects, assume that Newtown Propane as a whole will har a large, positive income this year. Newtown Propane is also considering financing the project with 50% equity and 50% debt. The interest rate on the company's debt wiil be 11%. What will be the project's ROE if it produces an EBIT of $155,000 ? 26.14% 23.39% 30.27% 27.52% What will be the project's ROE if it produces an EBIT of $55,000 and it finances 50% of the project with equity and 50% with debt? When calculating the tax effects, assume that Newtown Propane as a whole will have a large, positive income this year. 27.22%23.03%20.94%24.08% The use of financial leverage the expected ROE, risk borne by stockholders. The greater the firm's chance of bankruptcy, the the probability of a large loss, and consequently is more likely to use debt in an effort to boost profits. Its optimal debt ratio will be. manoger

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