Question

Ronaldo Company needs a capital of $200,000; it can either use no debt or use a debt for 60% with a 12% interest rate.
It has 9,000 shares outstanding that are expected to stay constant for any financing strategy taken and it has the following information:

Price/ Unit $5
Variable cost/Unit $2
Fixed costs $50,000
Tax rate 40%

The expected units sold based on probability of economic situation:
Economy Probability Units Sold
Good 0.2 140,000
Normal 0.5 80,000
Bad 0.3 10,000

7) If the company carries no debt, its Expected EPS is *

10.87%

$9.9

$10.87

None of the above

8) If the company has a 60% debt ratio, its Expected EPS is *

10.87%

$13.07

$10.87

$9.903

9) If D/A ratio is 60%, the standard deviation of the company’s ROE would be *

103.32%

413.33%

0.565

10.4

10) If D/A ratio is 0%, the standard deviation of the company’s ROE would be *

1.033%

41.33%

0.565

10.4

11) If D/A ratio is 60%, the standard deviation of the company’s EPS is *

$9.18

10.654%

7.245%

$20.22

12) If D/A ratio is 0%, the standard deviation of the company’s EPS is *

$9.184

10.654%

$7.245

3.434%

Answer 1