Problem #2: Uncertainty

Scenario D

Zero Debt

Calculate:

• The expected net income for each probability

1. The expected dollar return to investors for each probability
2. The expected ROE for each probability
3. What the company can expect its net income to be given these probabilities
4. What the company can expect dollar return to investors to be given these probabilities
5. What the company can expect its ROE to be given these probabilities

Scenario E

However, assume the company now has 5,000,000 SAR Debt

Calculate:

• The expected net income for each probability

1. The expected dollar return to investors for each probability
2. The expected ROE for each probability
3. What the company can expect its net income to be given these probabilities
4. What the company can expect dollar return to investors to be given these probabilities
5. What the company can expect its ROE to be given these probabilities

Based upon those calculations answer the following questions:

• Does the increased leverage offer the potential of an increased ROE?

1. What impact does the increased leverage have on the risk to stock holders?
2. Is it always a good idea to use debt financing?

Make recommendations to the organization as to the course of action that they should follow considering all risk factors. Please make certain that you show your calculations. Submit your findings in a proposal to the hospital.

use excel to show calculations