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.
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