Question

1. Use the following table to answer the following questions:

Total Capital: $5,000.00

Debt to Capital 50%

Debt: __???___

Interest Rate: 8.00%

Equity: $2,500.00

Tax Rate: 40.00%

_____Scenario #1 _____ Scenario 2 _____ Scenario 3

EBIT: $2,000.00 ------------ $1,500.00 --------- $1,000.00

(I) $ 200.00 ------------- $ 200.00 ------------ $ 200.00

EBT $1,800.00 ----------- $1,300.00 ---------- $__???__

(T) $ 720.00 -------------- $__???__ -------- $ 320.00

NI $1,080.00 ------------ $ 780.00 ----------- $ 480.00

ROE: __???__% -------------- 31.2% ----------- 19.20%

a) What is the amount of debt? __________

b) What is the Return of Equity for Scenario 1? (Express as a percentage) __________

c) What is the tax expense for Scenario 2? __________

d) What is the Earning Before Taxes in Scenario 3? __________

Thank you in advance!!

Answer 1

Req a:
Total Capital				5000
Debt to capital				50%
(i.e. debt / capital)
Therefore, Debts (5000*50%)				2500
Debts = 2500
Req b:
EBIT			2000
Less: Interest (2500*8%)			200
EBT			1800
Less: tax @40%			720
NI			1080
Divide: Equity amount			2500
ROE			43.20%
Req c:
Tax expense in Scenario-2
EBIT			1500
Less: Interest (2500*8%)			200
EBT			1300
Tax @ 40%		(1300*40%)	520
Tax expenses = $ 520
Req d:
Earnings before tax:
Net income			480
Add: tax			320
EBT			800
Add: Interest (2500*8%)			200
EBIT			1000
Earnings before tax = $ 800