80.2K

Verified Solution

Link Copied!

d Due on Tomorrow at 11:59 PM CDT Attempts: 2 Keep the Highest: 2/9 3. The effect of financial leverage on ROE Aa Aa companies that use debt in their capital structure are said to be using financial leverage. using leverage can increase shareholder returns, but leverage also increases the risk that shareholders bear Consider the following case wizard is considering a project that will require $600,000 in assets. The project wil be financed with 100% equity, me company faces a tax rate of 35%, what will be the ROE (return on equity) for this project if it produces an EBIT (eanings before interest and taxes) of $140,000 o 10.6% o 16.0% o 12.2% o 15.2% Determine what the project's ROE will be if its EBIT s -$40,000 when calculating the tax effects, assume that wizard Co. as a whole will have a large, positive income this year O-3.7% 0-52% 0-4.3% 0-4.9% Wizard Co. is also considering financing the project with 50% equity and 50% debt. The interest rate on the company's debt will be 11%, what will be the project's ROE if it produces an EBIT of $140,000? o 19.7% 18.6% 23.2% 26.7% what wil' be the project's ROE if it produces an EBIT of 40,000 and it finances so0% of the project with equity and 50% with debt? When calculating the tax effects, assume that wizard co as a whole will have a large, positive income this year. -19.8% 0-174% -15.0% -15.8% The use of financial leverage consequently the expected ROE the probability of a large loss, and the risk borme by stockholders. The greater the firm's chance of bankruptcy, the its optimal debt ratio wil be. manager is more likely to use debt in an effort to boost profits

Answer & Explanation Solved by verified expert

See Answer