You were hired as the CFO of a new company that was founded by three professors at your university. The company plans to manufacture and sell a new product, a cell phone that can be worn like a wrist watch. The issue now is how to finance the company, with equity only or with a mix of debt and equity. The price per phone will be $250.00 regardless of how the firm is financed. The expected fixed and variable operating costs, along with other data, are shown below. How much higher or lower will the firm's expected ROE be if it uses 60% debt rather than only equity, i.e., what is ROEL - ROEU? 0% Debt, U 60% Debt, L Expected unit sales (Q) 33,500 33,500 Price per phone (P) $250.00 $250.00 Fixed costs (F) $1,000,000 $1,000,000 Variable cost/unit (V) $200.00 $200.00 Required investment $2,500,000 $2,500,000 % Debt 0.00% 60.00% Debt, $ $0 ?? Equity, $ $2,500,000 ?? Interest rate NA 10.00% Tax rate 25.00% 25.00% Group of answer choices 20.85% 19.13% 14.92% 17.40% 21.04%
You were hired as the CFO of a new company that was founded by three professors at your university. The company plans to manufacture and sell a new product, a cell phone that can be worn like a wrist watch. The issue now is how to finance the company, with equity only or with a mix of debt and equity. The price per phone will be $250.00 regardless of how the firm is financed. The expected fixed and variable operating costs, along with other data, are shown below. How much higher or lower will the firm's expected ROE be if it uses 60% debt rather than only equity, i.e., what is ROEL - ROEU? 0% Debt, U 60% Debt, L Expected unit sales (Q) 33,500 33,500 Price per phone (P) $250.00 $250.00 Fixed costs (F) $1,000,000 $1,000,000 Variable cost/unit (V) $200.00 $200.00 Required investment $2,500,000 $2,500,000 % Debt 0.00% 60.00% Debt, $ $0 ?? Equity, $ $2,500,000 ?? Interest rate NA 10.00% Tax rate 25.00% 25.00% Group of answer choices 20.85% 19.13% 14.92% 17.40% 21.04%
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Concept explainers
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
Question
You were hired as the CFO of a new company that was founded by three professors at your university. The company plans to manufacture and sell a new product, a cell phone that can be worn like a wrist watch. The issue now is how to finance the company, with equity only or with a mix of debt and equity. The price per phone will be $250.00 regardless of how the firm is financed. The expected fixed and variable operating costs, along with other data, are shown below. How much higher or lower will the firm's expected ROE be if it uses 60% debt rather than only equity, i.e., what is ROEL - ROEU?
| 0% Debt, U | 60% Debt, L | ||
| Expected unit sales (Q) | 33,500 | 33,500 | |
| Price per phone (P) | $250.00 | $250.00 | |
| Fixed costs (F) | $1,000,000 | $1,000,000 | |
| Variable cost/unit (V) | $200.00 | $200.00 | |
| Required investment | $2,500,000 | $2,500,000 | |
| % Debt | 0.00% | 60.00% | |
| Debt, $ | $0 | ?? | |
| Equity, $ | $2,500,000 | ?? | |
| Interest rate | NA | 10.00% | |
| Tax rate | 25.00% | 25.00% |
Group of answer choices
20.85%
19.13%
14.92%
17.40%
21.04%
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