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%
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Homework Answers

Answer #1

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

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