Question
Suppose Green Rabbit Transportation Inc. is considering a project that will require $400,000 in assets. The company is small, so it is exempt from the
Suppose Green Rabbit Transportation Inc. is considering a project that will require $400,000 in assets.
The company is small, so it is exempt from the interest deduction limitation under the new tax law. | |
The project is expected to produce earnings before interest and taxes (EBIT) of $45,000. | |
Common equity outstanding will be 15,000 shares. | |
The company incurs a tax rate of 25%. |
If the project is financed using 100% equity capital, then Green Rabbit Transportation Inc.s return on equity (ROE) on the project will be ________ . In addition, Green Rabbits earnings per share (EPS) will be ________ .
Alternatively, Green Rabbit Transportation Inc.s CFO is also considering financing the project with 50% debt and 50% equity capital. The interest rate on the companys debt will be 11%. Because the company will finance only 50% of the project with equity, it will have only 7,500 shares outstanding. Green Rabbit Transportation Inc.s ROE and the companys EPS will be _______ if management decides to finance the project with 50% debt and 50% equity.
When a firm uses debt financing, the business risk exposure for the firms common shareholders will .increase or decrease (choose one)
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