Ch $13$: Assignment $-$ Capital Structure and Leverage

Sombra Corp. is a small company and is considering a project that will require $$650,000$ in assets. The project will be financed with $100\%$ equity. The

company faces a tax rate of $25\%.$ What will be the ROE $($return on equity$)$ for this project if it produces an EBIT $($earnings before interest and taxes$)$ of

$$155,000?$

$11\mathrm{.}62\%$

$15\mathrm{.}20\%$

$18\mathrm{.}77\%$

$17\mathrm{.}88\%$

Determine what the project's ROE will be if its EBIT is $-$$$60,000.$ When calculating the tax effects, assume that Sombra Corp. as a whole will have a

large, positive income this year.

$-6\mathrm{.}9\%$

$-5\mathrm{.}86\%$

$-7\mathrm{.}93\%$

$-7\mathrm{.}59\%$

Sombra Corp. is also considering financing the project with $50\%$ equity and $50\%$ debt. The interest rate on the company's debt will be $11\%.$ What will

be the project's ROE if it produces an EBIT of $$155,000?$

$27\mathrm{.}52\%$

$20\mathrm{.}64\%$

$28\mathrm{.}90\%$

$31\mathrm{.}65\%$

What will be the project's ROE if it produces an EBIT of $-$$$60,000$ and it finances $50\%$ of the project with equity and $50\%$ with debt? When calculating

the tax effects, assume that Sombra Corp. as a whole will have a large, positive income this year.

$-26\mathrm{.}52\%$

$-20\mathrm{.}99\%$

$-22\mathrm{.}10\%$

$-27\mathrm{.}62\%$

The use of financial leverage

the expected ROE,

risk borne by stockholders. The greater the firm's chance of bankruptcy, the

is more likely to use debt in an effort to boost profits.

its optimal debt ratio will be

the

the probability of a large loss, and consequently

manager