Three Waters Co. is considering a project that will require $600,000 in assets.

Question

Three Waters Co. is considering a project that will require $600,000 in assets. The project will be financed with 100 equity. The company faces a tax rate of 30%. What will be the ROE (return on equity) for this project if it produces an EBIT (earnings before interest and taxes) of $150,000? 14.9% 17.5% 14.0% 11.4% Determine what the project's ROE will be if its EBIT is-$45,000. When calculating the tax effects, assume that Thr Waters Co. as a whole will have a large, positive income this year. -4.2% -4.5% O-5.3% 9-4.8% three waters Co. is also considering financing the project with 50% equity and SO% debt. The interest rate on the company's debt will be 13%, what will be the project's ROE if it produces an EBIT of $150,000? 27.2% 22.0% 19.4% 25.9% O 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 Three Waters Co. as a whole will have a large, positive ncome this year. 9-20.6% -19.6% -18.6% -25.5% The use of financial leverage onsequently the expected ROB the risk borne by stockholders. The greater the firm's chance of bankruptcy, the the probability of a large loss, and ,- its optimal debt ratio will be. manager is more likely to use debt in an effort to boost rofits

Explanation / Answer

1. return on equity = 150,000*0.7/600,000 = 17.50%

2. return on equity = -45000*0.7/600,000 = -5.3%

3. return on equity = (150,000 - 300,000*0.13)*0.7/300,000 = 25.9%

4. return on equity = (-45,000 - 300,000*0.13)*0.7/300,000 = -19.6%

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