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

Ra = Net Farm Income before tax + Interest/Average Farm Assets

Assets=Debt + Equity

Based on this information, what is the projected Rate of Return on Equity after taxes, 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 r. Use the information above to calculate Ra . Remember that Net Farm Income before taxes is from the Income statement and is after interest.

12-8

Assume you have been asked to help Mr. Agirich determine the optimal leverage for his firm. Mr. Agirich provides you with the following probability distribution for Ra and you determine that his level of risk aversion is 2. Assume that i is 10%, and t=15%. Calculate the optimal leverage, expected Ra , the standard deviation of Ra and the coefficient of variation of Ra

What is the expected rate of return to assets?

12%

6.65%

10.76%

None of the above

What is the optimal leverage?

12%

0.33%

6.65%

None of the above

What is the expected rate of return to equity?

0.33

0.698

10.76%

None of the above

What is the standard deviation of the rate of return to equity?

0.33

7.5%

10.76%

None of the above

What is the coefficient of variation for the rate of return to equity?

0.33

7.5%

0.698

None of the above