Question

# The Presidio Pipe Co. has the following capital structure: Bonds (9.7%) \$140 mil Common Stock (\$4...

The Presidio Pipe Co. has the following capital structure:

Bonds (9.7%) \$140 mil

Common Stock (\$4 par) \$230 mil

Retained Earnings \$170 mil

EBIT is \$85 million and the tax rate is 40 percent. What is the firm's ROE and EPS?

 a ROE = 10.71% EPS = \$.75 b ROE = 7.94% EPS = \$.75 c ROE = 12.4% EPS = \$.86 d ROE = 11.7% EPS = 13.2%

ROE is computed as shown below:

= [ (EBIT - Amount of bonds x interest rate) x (1 - tax rate) ] / (Common stock + Retained Earnings)

= [ (\$ 85 million - \$ 140 million x 9.7%) x (1 - 0.40) ] / (\$ 230 million + \$ 170 million)

= \$ 42.852 million / \$ 400 million

= 10.71% Approximately

EPS is computed as follows:

= \$ 42.852 million / Number of shares

= [ \$ 42.852 million / (\$ 230 million / 4) ]

= \$ 42.852 million / 57.5 million

= \$ 0.75 Approximately

So, the correct answer is option a.

Feel free to ask in case of any query relating to this question

#### Earn Coins

Coins can be redeemed for fabulous gifts.