Question 6

1. ABC Corporation has: nPM=5%, TATO=3.00x, DR=20%. Their ROE is

   5%

   7.50%

   10%

   15%

   18.75%

   Question 7

   ABC Corporation issues $1m of new 30-year bonds with a coupon interest rate of 6%. If at the end of the year their EBIT is unchanged then their TIE will ________, their ROA will ___________ and their ROE will ________. (???? means that the effect cannot be predicted with certainty, given the information provided.)

   		decrease; decrease; decrease
   		increase; decrease; ?????
   		decrease; increase; ?????
   		increase; increase; decrease
   		decrease; decrease; ?????

   Question 8

   ABC Corporation issues $1m of new 30-year bonds with a coupon interest rate of 6%. The $1m is used to retire (repurchase) $1m of bonds that have a coupon interest rate of 8%. If at the end of the year their EBIT is unchanged then their TIE will ________, their ROA will ___________ and their ROE will ________. (???? means that the effect cannot be predicted with certainty, given the information provided.)

   decrease; decrease; decrease

   increase; decrease; ?????

   decrease; increase; ?????

   increase; increase; increase

   decrease; decrease; ?????

   Question 9

   ABC Corporation raises $1m by selling newly issued shares of common stock in the primary market. The $1m is used to retire $1m of bonds with a coupon interest rate of 5%. If at the end of the year their Sales and EBIT are unchanged then their nPM will ________, their ROA will ___________ and their ROE will ________. (???? means that the effect cannot be predicted with certainty, given the information provided.)

   		decrease; decrease; decrease
   		increase; increase; ?????
   		decrease; increase; ?????
   		increase; increase; increase
   		decrease; decrease; ?????

   Question 10

   "Financial leverage is blind" in the sense that if ROA is good it will make ROE better, but if ROA is bad it will make ROE worse.

   True

   False