Question

Powder Rangers has expected sales of $3 million a year. Variable costs are expected to be 55 percent of sales and fixed operating costs are $800000 a year. Total capital is presently $1000000 and must be expanded to $2000000 to generate the anticipated sales level. The company presently has no debt outstanding, and 50000 shares of stock. Additional common stock could be sold for $10 a share. The interest rate on new debt would be 6 percent and the tax rate is 35 percent. Compute the return on equity and earnings per share assuming the expansion is financed: Sales of $3 million, Var. cost of 55% of sales, Fixed cost of $800000 per year, new capital needed

$1000000 ($2000000 - $1000000), number of shares 50000 shares, stock price of $10, interest expense of 6%, tax of 35%, assume no preferred dividends. a. exclusively with debt, b. exclusively with equity and c. with one-half debt and one-half equity.

1) Calculate return on equity (ROE) and earnings per share (EPS) if expansion is financed by equity.

A       35.75%; $7.15

B       17.88%; $2.38

C       21.23%; $3.19

D       23.18%; $3.48

E       31.85%; $6.37

2) Calculate return on equity (ROE) and earnings per share (EPS) if expansion is financed by debt.

A       23.18%; $3.48

B       35.75%; $7.15

C       17.88%; $2.38

D       31.85%; $6.37

3) Calculate return on equity (ROE) and earnings per share (EPS) if expansion is financed by equity and debt equally.

A        35.75%; $7.15

B        21.23%; $3.19

C        17.88%; $2.38

D        23.18%; $3.48

The Answer for # 1 is B

The Answer for #2 is D

The Answer for #3 is D

Please show calculation in Excel on how to get the answers and show the function page.

Answer 1