Part A:

ABC's return on equity (net income / shareholders equity) was very poor last year, but management has come up with a plan to improve things. The new plan calls for a debt ratio (total liabilities/total assets) of 52 percent, which will generate interest expenses of $317,000 per year. Management projects that the operating profit margin (EBIT/Sales) will be 12.9 percent on sales of $19 million. They project a total asset turnover ratio (Sales/Total Assets) of 1.3 and a tax rate of 40 percent. Given that information, what will be ABC's ROE under the new plan? Show your answer as a decimal to three places. For example, if you calculated 12.3%, then you would input 0.123 as your answer).

Part B:

Compute the weighted average cost of capital for each of these firms. Assume a marginal tax rate of 40 percent.

- A. B. C. D. E.	Target capital structure is 40% debt and 60% common equity. Yield to maturity on bonds is 8.5% and expected return on common equity is 11.1%.
- A. B. C. D. E.	Target capital structure is 30% debt and 70% common equity. Yield to maturity on bonds is 6.7% and expected return on common equity is 9.5%.
- A. B. C. D. E.	Target capital structure is 10% debt and 90% common equity. Yield to maturity on bonds is 7.9% and expected return on common equity is 9.9%.
- A. B. C. D. E.	Target capital structure is 60% debt and 40% common equity. Yield to maturity on bonds is 4.9% and expected return on common equity is 12.1%.
- A. B. C. D. E.	Target capital structure is 80% debt and 20% common equity. Yield to maturity on bonds is 6.1% and expected return on common equity is 16.0%.

A.	6.6%
B.	7.9%
C.	8.7%
D.	6.1%
E.	9.4%