Question

Hello, please advise, thank you.

Question #4

Commonwealth Construction (CC) needs $2 million of assets to get started, and it expects to have a basic earning power ratio of 15%. CC will own no securities, all of its income will be operating income. If it so chooses, CC can finance up to 35% of its assets with debt, which will have a 9% interest rate. If it chooses to use debt, the firm will finance using only debt and common equity, so no preferred stock will be used. Assuming a 25% tax rate on taxable income, what is the difference between CC's expected ROE if it finances these assets with 35% debt versus its expected ROE if it finances these assets entirely with common stock? Round your answer to two decimal places. percentage points

I got 4.5 percentage points and it was wrong.

Question #7

Answer 1

Please find the attached Answer:

35% debt and 65 equity 20,00,000 Full equity 20,00,000 Total Capital Required 3,00,000 =2000000*15% Earning Before Interest and Tax Interest Earning Before Tax Тах Earning Before Tax 3,00,000 63,000 2,37,000 59,250 1,77,750 =2000000*15% =(2000000*35%)*9% =+C6-C7 =+C8*25% =+C8-C9 3,00,000 75,000 2,25,000 =+E6-E7 =+E8*25% =+E8-E9 Expected ROE 8.89% =+C10/04 11.25% =+E10/E4

a Difference Between Expected ROE 2.36% 14 15 16 b Current Ratio = Current assets Current Liabilities ROE (Before Change) = ROE (after Change) = 4.80% 11.63% -40000/834040 =+(40000+51040)/(834040-51040) Present CR = 5.00 =+C19/C20 New Quick ratio = 4.22 =+C35/C20 9,28,000 1,85,600 Revised CR = 2.25 Revised CR = Revised Current assets Current Liabilities(Same) Same as it is Give that only inventory changes makes CR to 2.25 2.25 = Revised Current assets 1,85,600 Revised Current assets 4,17,600 =+C28*2.25 Increase in Sales Increase in Net income 5,10,400 =+C19-C30 51,040 (10% is net income) Revised value of Equity = 7,83,000 =834040-C33