The structure of yields is as follows: 1 year 3% 2 years 4% 5 years 6%...

 

Transcribed Image Text:

The structure of yields is as follows: 1 year 3% 2 years 4% 5 years 6% 10 years 8% The firm's assets are $2,000, which have to be financed. Three possibilities are 1. $2,000 in equity 2. $1,200 in equity and $800 in liabilities (a one-year loan) 3, $1,200 in equity and $800 in liabilities (a ten-year loan) The firm's revenues are $2,400 and operating expenses are $2,000. The firm's tax rate is 40%. 1. What is the return on equity under each financing alternative? During the second year, sales decline to $2,100 while the operating expenses the tax rate do not change. The structure of yields becomes: 1 year 10% 2 years 11% 5 years 12% 10 years 14% 2. What is the return on equity under each financing alternative? 3. What is the implication of the change in revenues and the use of short-term debt financing instead of long-term debt financing during the two years? The structure of yields is as follows: 1 year 3% 2 years 4% 5 years 6% 10 years 8% The firm's assets are $2,000, which have to be financed. Three possibilities are 1. $2,000 in equity 2. $1,200 in equity and $800 in liabilities (a one-year loan) 3, $1,200 in equity and $800 in liabilities (a ten-year loan) The firm's revenues are $2,400 and operating expenses are $2,000. The firm's tax rate is 40%. 1. What is the return on equity under each financing alternative? During the second year, sales decline to $2,100 while the operating expenses the tax rate do not change. The structure of yields becomes: 1 year 10% 2 years 11% 5 years 12% 10 years 14% 2. What is the return on equity under each financing alternative? 3. What is the implication of the change in revenues and the use of short-term debt financing instead of long-term debt financing during the two years?

Answer rating: 100% (QA)

Point to note If we enter into a loan on Day1 any further changes in interest rates does not affect ... View the full answer