Question
In: Finance
CCC needs $1 million of assets to get started and expects itsbasic earning power ratio,...
CCC needs $1 million of assets to get started and expects its basic earning power ratio, BEP=EBIT/TA, to equal 30%. All of CCC’s income will be operating income. CCC can finance up to 80% of its assets with debt at 5%. Assuming a 30% tax rate, what is the ROE if the firm finances with 10% debt, AND what is the ROE if the firm finances with 80% debt?
Solutions
jeff jeffy answered 2 years agoRelated Solutions
Commonwealth Construction (CC) needs $1 million of assets to get started, and it expects to have...
Commonwealth Construction (CC) needs $1 million of assets to get
started, and it expects to have a basic earning power ratio of 10%.
CC will own no securities, so all of its income will be operating
income. If it so chooses, CC can finance up to 55% of its assets
with debt, which will have an 9% interest rate. If it chooses to
use debt, the firm will finance using only debt and common equity,
so no preferred stock will...
Commonwealth Construction (CC) needs $1 million of assets to get started, and it expects to have...
Commonwealth Construction (CC) needs $1 million of assets to get
started, and it expects to have a basic earning power ratio of 20%.
CC will own no securities, so all of its income will be operating
income. If it so chooses, CC can finance up to 35% of its assets
with debt, which will have an 7% interest rate. If it chooses to
use debt, the firm will finance using only debt and common equity,
so no preferred stock will...
Commonwealth Construction (CC) needs $1 million of assets to get started, and it expects to have...
Commonwealth Construction (CC) needs $1 million of assets to get
started, and it expects to have a basic earning power ratio of 35%.
CC will own no securities, so all of its income will be operating
income. If it so chooses, CC can finance up to 30% of its assets
with debt, which will have an 7% interest rate. If it chooses to
use debt, the firm will finance using only debt and common equity,
so no preferred stock will...
Commonwealth Construction (CC) needs $3 million of assets to get started, and it expects to have...
Commonwealth Construction (CC) needs $3 million of assets to get
started, and it expects to have a basic earning power ratio of 20%.
CC will own no securities, so all of its income will be operating
income. If it so chooses, CC can finance up to 50% of its assets
with debt, which will have an 9% interest rate. If it chooses to
use debt, the firm will finance using only debt and common equity,
so no preferred stock will...
Commonwealth Construction (CC) needs $2 million of assets to get started, and it expects to have...
Commonwealth Construction (CC) needs $2 million of assets to get
started, and it expects to have a basic earning power ratio of 10%.
CC will own no securities, so all of its income will be operating
income. If it so chooses, CC can finance up to 55% of its assets
with debt, which will have an 9% interest rate. If it chooses to
use debt, the firm will finance using only debt and common equity,
so no preferred stock will...
Commonwealth Construction (CC) needs $2 million of assets to get started, and it expects to have...
Commonwealth Construction (CC) needs $2 million of assets to get
started, and it expects to have a basic earning power ratio of 10%.
CC will own no securities, so all of its income will be operating
income. If it so chooses, CC can finance up to 50% of its assets
with debt, which will have an 8% interest rate. If it chooses to
use debt, the firm will finance using only debt and common equity,
so no preferred stock will...
Commonwealth Construction (CC) needs $2 million of assets to get started, and it expects to have...
Commonwealth Construction (CC) needs $2 million of assets to get
started, and it expects to have a basic earning power ratio of 25%.
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 9% interest rate. If it chooses to use
debt, the firm will finance using only debt and common equity, so
no preferred stock will be...
Commonwealth Construction (CC) needs $2 million of assets to get started, and it expects to have...
Commonwealth Construction (CC) needs $2 million of assets to get
started, and it expects to have a basic earning power ratio of 30%.
CC will own no securities, so all of its income will be operating
income. If it so chooses, CC can finance up to 30% of its assets
with debt, which will have an 8% interest rate. If it chooses to
use debt, the firm will finance using only debt and common equity,
so no preferred stock will...
Commonwealth Construction (CC) needs $2 million of assets to get started, and it expects to have...
Commonwealth Construction (CC) needs $2 million of assets to get
started, and it expects to have a basic earning power ratio of 10%.
CC will own no securities, so all of its income will be operating
income. If it so chooses, CC can finance up to 45% of its assets
with debt, which will have an 9% interest rate. If it chooses to
use debt, the firm will finance using only debt and common equity,
so no preferred stock will...
Commonwealth Construction (CC) needs $3 million of assets to get started, and it expects to have...
Commonwealth Construction (CC) needs $3 million of assets to get
started, and it expects to have a basic earning power ratio of 20%.
CC will own no securities, so all of its income will be operating
income. If it so chooses, CC can finance up to 60% of its assets
with debt, which will have an 12% interest rate. If it chooses to
use debt, the firm will finance using only debt and common equity,
so no preferred stock will...
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