Question
The cost of capital is the rate of return required by investors in the companys securities. It thus follows that a capital structure should derive
The cost of capital is the rate of return required by investors in the company’s securities. It thus follows that a capital structure should derive the lowest cost of capital which maximizes the value of the company. Consider the following extract with financial information of Company A & Company B:
Company B Company B
R’000 R’000
Equity 1 000 600
Debt - 400
Total assets 1 000 1 000
EBIT 400 400
Interest - (44)
Income before tax 400 356
Tax (112) (99.7)
Net income 288 256.3
Required:
Calculate the ROE and ROA for the Companies A and B respectively.
Compare and discuss the ROA and ROE of the two companies as calculated above.
What happens if the ROA is lower than the interest charge (negative gearing)?
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Calculation of ROE Return on Equity and ROA Return on Assets 1 Company A ROE Net Income Equity ROA N...
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Smith and Roberson Business Law
Authors: Richard A. Mann, Barry S. Roberts
15th Edition
1285141903, 1285141903, 9781285141909, 978-0538473637
