Sims Corp. will buy back 900 of its 2500 shares outstanding. The return on equity before the
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Question:
Sims Corp. will buy back 900 of its 2500 shares outstanding. The return on equity before the buy-back is 18%. The debt-to-equity ratio before the buy-back is 1. Also, the company plans to keep a constant debt level, with an interest rate of 3%. Assume the return on unlevered equity is not affected by the buyback, no taxation and perfect capital markets. What will be the new return on equity after the buy-back?
answer: 22.22%
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