In: Finance
1- Commonwealth Construction (CC) needs $3 million of assets to get started, and it expects to have a basic earning power ratio of 30%. CC will own no securities, all of its income will be operating income. If it so chooses, CC can finance up to 40% of its assets with debt, which will have a 12% 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 40% debt versus its expected ROE if it finances these assets entirely with common stock? Round your answer to two decimal places.
2- Assume the following relationships for the Caulder Corp.:
Sales/Total assets 2.2×
Return on assets (ROA) 4.0%
Return on equity (ROE) 9.0%
Calculate Caulder's profit margin and debt-to-capital ratio assuming the firm uses only debt and common equity, so total assets equal total invested capital. Do not round intermediate calculations. Round your answers to two decimal places. Profit margin: % Debt-to-capital ratio: %