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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

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.

The projected Rate of Return on Equity after taxes is

A. 12%

B. 10%

C. 15.3%

D. 11.7%

E. None of the above

Which of the following changes does not increase the rate of return on equity after taxes?

A. Do a better job of merchandising credit

B. Reduce leverage

C. Make more profitable investments

D. Adoption of new (improved) technologies

E. None of the above

The projected Rate of Return on Equity after taxes is

A. 5%

B. 10%

C. 15.3%

D. 0.5%

E. None of the above

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 profitability (use the same ra that was calculated previously)?

To achieve a re = to 13.6, the leverage ratio needs to be ?

A. 1.5

B. 2.0

C. 2.5

D. 3.0

E. None of the above

How much additional debt will the farm need to incur to achieve a re = to 13.6?

A. $890,000

B. $395,000

C. $495,000

D. $400,000

E. None of the above

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. The projected Rate of Return on Equity after taxes is

A. 5%

B. -4.3%

C. 0%

D. 0.5%

E. None of the above

As leverage increases, the separation between the re increases for different rates of return to assets.

A. True

B. False

If the rate of return to assets is less than the interest rate, leverage accentuates losses in equity.

A. True

B. False

C. It depends on the tax rate.

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