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ou work for the CEO of a new company that plans to manufacture and sell a new product,  a watch that has an embedded TV set and a magnifying glass crystal. The issue now is  how to finance the company, with only equity or with a mix of debt and equity. Expected  operating income is P400,000. Other data for the firm are shown below. How much higher  or lower will the firm's expected ROE be if it uses some debt rather than all equity, i.e.,  what is ROEL − ROEU?

ou work for the CEO of a new company that plans to manufacture and sell a new product,  a watch that has an embedded TV set and a magnifying glass crystal. The issue now is  how to finance the company, with only equity or with a mix of debt and equity. Expected  operating income is P400,000. Other data for the firm are shown below. How much higher  or lower will the firm's expected ROE be if it uses some debt rather than all equity, i.e.,  what is ROEL − ROEU?

Essentials Of Investments
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
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You work for the CEO of a new company that plans to manufacture and sell a new product, 
a watch that has an embedded TV set and a magnifying glass crystal. The issue now is 
how to finance the company, with only equity or with a mix of debt and equity. Expected 
operating income is P400,000. Other data for the firm are shown below. How much higher 
or lower will the firm's expected ROE be if it uses some debt rather than all equity, i.e., 
what is ROEL − ROEU?

0% Debt. U $400,000 $2,500,000 Qper income (EBIT) Required investment % Debt S of Debt $ of Common equity Interest rate 60% Debt. L $400,000 $2,500,000 60.0% $1,500,000 $1,000,000 10.00% 0.0% $0.00 $2,500,000 NA Таx rate 35% 35%
Transcribed Image Text:0% Debt. U $400,000 $2,500,000 Qper income (EBIT) Required investment % Debt S of Debt $ of Common equity Interest rate 60% Debt. L $400,000 $2,500,000 60.0% $1,500,000 $1,000,000 10.00% 0.0% $0.00 $2,500,000 NA Таx rate 35% 35%
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