Quigley Inc. is considering two financial plans for the coming year. Management expects salesto be $300,000, operating costs to be $265,000, assets (which is equal to its total investedcapital) to be $200,000, and its tax rate to be 35%. Under Plan A it would finance the firmusing 25% debt and 75% common equity. The interest rate on the debt would be 8.8%, butunder a contract with existing bondholders the TIE ratio would have to be maintained at orabove 5.0. Under Plan B, the maximum debt that met the TIE constraint would be employed.Assuming that sales, operating costs, assets, total invested capital, the interest rate, and thetax rate would all remain constant, by how much would the ROE change in response to thechange in the capital structure? Do not round your intermediate calculations. a. 1.68% b.1.85% c. 2.03% d. 1.52% e. 2.31%

ROE is the return earned by shareholders of the company and can be measured as net income divided by…

Answered: Quigley Inc. is considering two…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter4: Financial Planning And Forecasting

Section: Chapter Questions

Problem 6P

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Towson Industries is considering an investment of $256,950 that is expected to generate returns of $90,000 per year for each of the next four years. What Is the Investments internal rate of return?
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Rentz Corporation is investigating the optimal level of current assets for the coming year. Management expects sales to increase to approximately $4 million as a result of an asset expansion presently being undertaken. Fixed assets total $1 million, and the firm plans to maintain a 55% debt-to - assets ratio. Rentz's interest rate is currently 10% on both short-term and long-term debt (which the firm uses in its permanent structure). Three alternatives regarding the projected current assets level are under consideration: (1) a restricted policy where current assets would be only 45% of projected sales, (2) a moderate policy where current assets would be 50% of sales, and (3) a relaxed policy where current assets would be 60% of sales. Earnings before interest and taxes should be 12% of total sales, and the federal-plus-state tax rate is 40%. What is the expected return on equity under each current assets level? Round your answers to two decimal places. Restricted policy % Moderate…

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