17.2 Southwest Physicians, a medical group practice, is just being formed. It wi
ID: 2406952 • Letter: 1
Question
17.2 Southwest Physicians, a medical group practice, is just being formed. It will need $2 million of total assets to generate $3 million in revenues. Furthermore, the group expects to have a profit margin of 5 percent. The group is considering two financing alternatives. First, it can use all-equity financing by requiring each physician to contribute his or her pro rata share. Alternatively, the practice can finance up to 50 percent of its assets with a bank loan. Assuming that the debt alternative has no impact on the expected profit margin, what is the difference between the expected ROE if the group finances with 50 percent debt versus the expected ROE if it finances entirely with equity capital? 72 Rivercide Memoeio g m.Explanation / Answer
1)ROE refers Return On Equity
2)it measures the efficiency of share holders equity
3) it is the relationship between the net income and share holders equity.
4) it measures the profitability of the company with the book value of share holders equity
5) the following equation is helf ful to calculate ROE
ROE= net income / share holders equity *100
Answer
In a given problem , it will need $2million of total assets and
it generates total revenue of $3 million
Expected profit margin is 5percent
Net profit margin is un effected
so net profit = $3million *5/100 =$0.15 million
Alternative 1 if the firm finances entirely with equity then total equity capital $2 million
ROE =net profit /share holders equity *100
=$0.15 million / $2 million *100
= 7.5 percentage
Alternative 2
If the firm finances 50 percent of assets by bank loan then capital structure is 50 percent debt and 50 percent equity
Total capital = 1millon debt + 1million equity =2million total capital
share holders equity is 1million under alternative 2
ROE =$.015 million / $1 million *100
= 15 percentage
Thank you
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.