Problem 4: a Compute the ROE of the firm with the current capital structure. b/ Assume that instead 1/ the firm spent S10 million more in Selling and Administration 2/ Sales are 7% higher 3/ the firm had 65% debt instead. 4/ We suppose that the interest payment will be the same as the current interest payment plus 1.9%. What is the new ROE? c/ What is the new sustainable growth? d/ What is the value of the stock using the dividend model if the firm grows at a constant rate g calculated in e/? el What is the dividend yield? Question: What could be the reasons why that firm may want to increase the level of debt? What could the firm do to lower the interest at the same time? Art Review Styles A ABCDE ABACAXARE AaBbCd AaBbCcDe AaBbc AabbCeDd Title Subtitle Subtle Normal No Spacing Heading 2 Heading 1 2017 2012 162 20 414.6 25 (0.3) (0.5) (1) 179.2 (5.3) 4.7 (1) 430.5 2011 2012 Cash Flow 700 1312 Eram operation (300) (506) Ner Income (68) (64) Depreciation (20) (31) Other non-cash items (16) (20) Cash effect of change in (108) (276.0) Account Receivables 177.6 414.6 Account Payable 2. 1743 4.441 Inventory 84 94 Total Change from operation From investing Capital expenditure Acquisition 750 340 Other investing activities 40 69.4 Total Change from investing 60 91 From financing 31 16 Dividend paid 281 316.4 Sale/purchase stock Increase borrowing 360 333 Toral Change from financing 250 205 Total change in cash (34) (2) Income Statement Sales Cost of goods sold Selling, general, and administrative cost Depreciation Interest Tares Net Income Earnings per share Common shares outstanding (millions) Balance Sheet Current Assets Cash Account Receivables Inventaries Other Current Assets Total Current Assets Long Term Assets Land Building 267.3 Equipment Less Accumulated Depreciation Other Long-Term assets Total Long-Term Assets Total Assets (16) (7) (6) (23) (100) (168) 5.5 24.9 (94.5) (143.1) 76,7 104 (20) 20 728 1009 105 Required rate of return on equity: 1696 (43) Required rule of return on debt: 6% 111.4 Reanical rate of relun on preferred stockr: 896 731.4 1247.8 Target capital structure: 70% common stock, 25% debs and 5% preferred stocks Taxes: 4096 59 63 10 132 25 36.4 12 73.4 Current Liabilities Account Payable Short Term Debt Other current liabilities Total Current Liabilities Long Term Liabilities Long Term Debt Deferred Taxes Total Long-Term Liabilities Total Liabilities Shareholder's Equity Total Liabilities and Equity 280 285 280 337 655.6 1009 282 417 833.8 1247.8 Words: O of 270 A ? Problem 4: a Compute the ROE of the firm with the current capital structure. b/ Assume that instead 1/ the firm spent S10 million more in Selling and Administration 2/ Sales are 7% higher 3/ the firm had 65% debt instead. 4/ We suppose that the interest payment will be the same as the current interest payment plus 1.9%. What is the new ROE? c/ What is the new sustainable growth? d/ What is the value of the stock using the dividend model if the firm grows at a constant rate g calculated in e/? el What is the dividend yield? Question: What could be the reasons why that firm may want to increase the level of debt? What could the firm do to lower the interest at the same time? Art Review Styles A ABCDE ABACAXARE AaBbCd AaBbCcDe AaBbc AabbCeDd Title Subtitle Subtle Normal No Spacing Heading 2 Heading 1 2017 2012 162 20 414.6 25 (0.3) (0.5) (1) 179.2 (5.3) 4.7 (1) 430.5 2011 2012 Cash Flow 700 1312 Eram operation (300) (506) Ner Income (68) (64) Depreciation (20) (31) Other non-cash items (16) (20) Cash effect of change in (108) (276.0) Account Receivables 177.6 414.6 Account Payable 2. 1743 4.441 Inventory 84 94 Total Change from operation From investing Capital expenditure Acquisition 750 340 Other investing activities 40 69.4 Total Change from investing 60 91 From financing 31 16 Dividend paid 281 316.4 Sale/purchase stock Increase borrowing 360 333 Toral Change from financing 250 205 Total change in cash (34) (2) Income Statement Sales Cost of goods sold Selling, general, and administrative cost Depreciation Interest Tares Net Income Earnings per share Common shares outstanding (millions) Balance Sheet Current Assets Cash Account Receivables Inventaries Other Current Assets Total Current Assets Long Term Assets Land Building 267.3 Equipment Less Accumulated Depreciation Other Long-Term assets Total Long-Term Assets Total Assets (16) (7) (6) (23) (100) (168) 5.5 24.9 (94.5) (143.1) 76,7 104 (20) 20 728 1009 105 Required rate of return on equity: 1696 (43) Required rule of return on debt: 6% 111.4 Reanical rate of relun on preferred stockr: 896 731.4 1247.8 Target capital structure: 70% common stock, 25% debs and 5% preferred stocks Taxes: 4096 59 63 10 132 25 36.4 12 73.4 Current Liabilities Account Payable Short Term Debt Other current liabilities Total Current Liabilities Long Term Liabilities Long Term Debt Deferred Taxes Total Long-Term Liabilities Total Liabilities Shareholder's Equity Total Liabilities and Equity 280 285 280 337 655.6 1009 282 417 833.8 1247.8 Words: O of 270 A