Question

Ronaldo Company needs a capital of $200,000; it can either use no debt or use a debt for 60% with a 12% interest rate.
It has 9,000 shares outstanding that are expected to stay constant for any financing strategy taken and it has the following information:

Price/ Unit $5
Variable cost/Unit $2
Fixed costs $50,000
Tax rate 40%

The expected units sold based on probability of economic situation:
Economy Probability Units Sold
Good 0.2 140,000
Normal 0.5 80,000
Bad 0.3 10,000

1) If the company has no debt, in a good economic situation its ROE is *

266.7%

111%

0.111%

113.89%

2) If the company decides to have a 60% debt ratio, its ROE in a normal economic situation is *

131.7%

241.6%

327.3%

3.273%

3) If the company decides to be 60% leveraged, its EPS in a bad economic situation would be *

-2.29%

-$20,640

-$1.33

-$2.29

4) If the company was unleveraged, its EPS in a good economic situation would be *

$12.67

$24.67

14.2%

None of the above

5) If the company has no debt, its expected ROE would be *

31.5%

48.9%

62%

None of the above

6) If the company has a 60% debt ratio, its expected ROE would be *

48.9%

147.01%

9.9%

None of the above

Answer 1

Ans:

1. 111%

2. 131.7%

3. -2.29 (Option 4)

4. 24.67

5. 48.9%

6. None of the abivruddi.