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Magic Moose Manufacturing is considering implementing a project that is identical to that being evaluated by Red Snail-although Magic Moose wants to finance the $500,000.00
Magic Moose Manufacturing is considering implementing a project that is identical to that being evaluated by Red Snail-although Magic Moose wants to finance the $500,000.00 in additional assets using 50% equity and 50% debt capital. The interest rate on Magic Moose's new debt is expected to be 14%, and the project is forecasted to generate an EBIT of $150,000. As a result, the project is expected to generate a ROE of Now assume that Magic Moose finances the same project with 50% debt and 50% equity capital, but expects it to generate an EBIT of only $60,000. Further assume that the company as a whole will generate a large, positive income this year, such that any loss generated by the project (with its resulting tax saving) will be offset by the company's other (positive) income. Remember, the interest rate on Magic Moose's debt is 14%. Under these conditions, it is reasonable to expect that Magic Moose will generate a ROE of: 7.80%6.5%7.15%8.13%
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