what will be the project\'s ROE if it produces an EBIT of-$45,000 and it finance
ID: 2786157 • Letter: W
Question
what will be the project's ROE if it produces an EBIT of-$45,000 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. -23.7% -18.2% -20.9% -21.8% the expected ROE, the probability of a large loss, and The use of financial leverage consequently increases by stockholders. The greater the firm's chance of bankruptcy, the its optimal debt r decreases manager is more likely to use debt in an effort to boost profits. O Type here to searchExplanation / Answer
ROE already mentioned in above question = -18.2%
The use of financial leverage increases the expected ROE, decreases the probability of a large loss, and consequently decreases the risk borne by stockholders. The greater the firm's chances of bankruptcy, the higher its optimal debt ratio will be. An aggressive manager is more likely touse debt in an effort to boost profits.
Notes:
1) Financial leverage increases the return on equity which is expected.
2) As it increases the expected ROE, the probability of a loss will be reduced and results in overall reduction in risk borne by stockholders.
3) Bankruptcy is a situation when a company is unable to pay its debt in present or in near future. It is a situation when the liabilities becomes higher than the asseets of company. A higher debt ratio means high debt over assets which means a greater chances of bankruptcy.
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