Multiple choice Q

Tim Powers has expected sales of $5 million a year. Variable costs are expected to be 60 percent of sales and fixed operating costs are $950000 a year. Total capital is presently $1200000 and must be expanded to $2000000 to generate the anticipated sales level. The company presently has no debt outstanding, and 60000 shares of stock. Additional common stock could be sold for $10 a share. The interest rate on new debt would be 6 percent and the tax rate is 30 percent. Compute the return on equity and earnings per share assuming the expansion is financed: Sales of $5 million, Var. cost of 60% of sales, Fixed cost of $950000 per year, new capital needed $800000 ($2000000 - $1200000), number of shares 60000 shares, stock price of $10, interest expense of 6%, tax of 30%, assume no preferred dividends. a. exclusively with debt, b. exclusively with equity and c. with one-half debt and one-half equity. Calculate return on equity (ROE) and earnings per share (EPS) if expansion is financed by equity.

Group of answer choices

Choose an answer from one of the following

58.45%; $11.69

45.41%; $7.27

36.75%; $5.25

61.25%; $12.25

43.84%; $7.01