Question

Khonaysser Motors needs a total capital of $2,500,000 for its new project. The company’s debt ratio is 35% and they are paying interest equal to 10%. The number of shares expected to be constant at 100,000 shares during the year 2020.
Below you can find expected useful information for the year 2020.

Economy Probability Units Sold
Good 0.25 4,000
Normal 0.40   3,000
Weak 0.35 2,700

Price / Unit $ 1000
Fixed Costs $ 1,500,000
Variable cost/ Unit $ 350
Price /Share $ 16.25
Tax Rate 40%

1: Calculate the expected ROE *

16.86%

37.38%

18.75%

6.18%

2: Calculate the risk in ROE (σROE) *

12.2502%

2.8456%

1.9544%

2.3318%

3: Calculate the expected EPS *

$3.2035

$2.7405

$2.5258

$1.9062

2: Calculate the risk in EPS (σEPS) *

$3.5235

$1.9987

$2.5225

$1.7564

Answer 1

Correct answers:

1. Expected ROE = 16.86%

2. Risk in ROE (σROE) = 12.2502%

3. Expected EPS = $2.7405

4. Risk in EPS (σEPS) = $1.9987

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -

Note: minor difference in risk value is due to rounding off.