Question
Ohio Quarry Inc. has $10 million in assets. Its expected operating income (EBIT) is $4 million and its income tax rate is 40 percent. If
Ohio Quarry Inc. has $10 million in assets. Its expected operating income (EBIT) is $4 million and its income tax rate is 40 percent. If Ohio Quarry finances 20 percent of its total assets with debt capital, the pretax cost of funds is 13 percent. If the company finances 40 percent of its total assets with debt capital, the pretax cost of funds is 18 percent. Round your answers to the questions below to two decimal places.
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Determine the rate of return on equity (ROE) under the three different capital structures (0, 20, and 40% debt ratios). 0% debt ratio: %
20% debt ratio: %
40% debt ratio: %
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Which capital structure yields the highest expected ROE? -Select-0 percent debt and 100 percent equity20 percent debt and 80 percent equity40 percent debt and 60 percent equityItem 4 yields the highest expected ROE.
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Determine the ROE under each of the three capital structures (0, 20, and 40% debt ratios) if expected EBIT decreases by 30 percent. 0% debt ratio: %
20% debt ratio: %
40% debt ratio: %
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Which capital structure yields the highest ROE calculated in part c? -Select-0 percent debt and 100 percent equity20 percent debt and 80 percent equity40 percent debt and 60 percent equityItem 8 yields the highest expected ROE.
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Determine the percentage change in ROE under each of the three capital structures (that is, debt ratios) as the result of a 30 percent decline in EBIT. Use the minus sign to enter a negative percentage change in ROE if necessary. 0% debt ratio: %
20% debt ratio: %
40% debt ratio: %
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Based on the results in part e, which capital structure yields the highest variability (that is, risk) in ROE? -Select-0 percent debt and 100 percent equity20 percent debt and 80 percent equity40 percent debt and 60 percent equityItem 12 the highest variability in ROE.
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