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krek1111 [17]
3 years ago
14

A firm currently has a debt-equity ratio of 1/2. The debt, which is virtually riskless, pays an interest rate of 6%. The expecte

d rate of return on the equity is 12%. What would be the expected rate of return on equity if the firm reduced its debt-equity ratio to 1/3? Assume the firm pays no taxes.
Business
1 answer:
Svetradugi [14.3K]3 years ago
4 0

Answer:

Expected return on equity is 11.33%

Explanation:

Using Weighted Average Cost Capital without tax formula, overall rate of return is given by the formula:

WACC=(Ke*E/V)+(Kd*D/V)

Kd is the cost of debt at 6%

Ke is the cost of equity at 12%

D/E=1/2 which means debt is 1 and equity is 2

D/V=debt/debt+equity=1/1+2=1/3

E/V=equity/debt+equity=2/1+2=2/3

WACC=(12%*2/3)+(6%*1/3)

WACC=10%

If the firm reduces debt-equity ratio to 1/3,1 is for debt 3 is for equity

D/V=debt/debt+equity=1/1+3=1/4

E/V=equity/debt+equity=3/1+3=3/4

WACC=10%

10%=(Ke*3/4)+(6%*1/4)

10%=(Ke*3/4)+1.5%

10%-1.5%=Ke*3/4

8.5%=Ke*3/4

8.5%=3Ke/4

8.5%*4=3 Ke

34%=3 Ke

Ke=34%/3

Ke=11.33%

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valkas [14]

Answer:

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4 0
3 years ago
Mel’s Meals 2 Go purchases cookies that it includes in the 10,000 box lunches it prepares and sells annually. Mel’s kitchen and
Irina18 [472]

Answer:

Current Operation (purchase of cookies) - $0.60

Alternative - $0.2 materials

$0.15 direct labor

$0.45 without increasing capacity of which $0.3 is fixed - meaning it would still be incurred at current capacity

                        <u> Mel's Meals Evaluation of Alternatives</u>

                                       Purchase                                Produce

                                            $                                              $

Cost to Buy                        0.6                                             -

Materials                               -                                             0.2

Direct Labor                         -                                             0.15

Overhead (Variable)            -                                             0.15

Total Cost                            0.6                                          0.5

Decision: Mel should not continue buying them as she would be saving $0.1 for every lunch meal.

Since there would not be an increase in the total fixed overhead if Mel's makes the cookies in-house, then the $0.3 fixed overhead is not significant in calculating the cost of producing.

Explanation:

The differential cost in this instance is $0.1 as Mel's saves that for every cookie made which multiplied by the number included in the box and by the total box prepared and sold gives = 0.1 * 2 * 10000 = $2,000 saved for making

5 0
3 years ago
Read 2 more answers
Syndie writes a fashion blog outside of her work hours and duties. One post in her blog used pictures of her coworkers as "what
Ne4ueva [31]

Answer:

B, Free speech

Explanation:

One of the rights of any human is the Freedom of speech. Freedom of speech has to do with the ability of opportunity for any person to express his or herself, freely, without prejudice.

In the case of Syndie, she has limited freedom of speech right at her office. This is because her management controls what the workers in the company are allowed to say and how it is said.

This is an infringement of her fundamental human right but also is a company policy and decision which she has to adhere to.

Cheers.

7 0
3 years ago
Alamos Co. exchanged equipment and $18,000 cash for similar equipment. The book value and the fair value of the old equipment we
Mila [183]

Answer:

correct option is B. $8,000

Explanation:

given data

equipment = $18,000

book value = $82,000

fair value = $90,000

to find out

Alamos would record a gain/(loss)

solution

we know that When exchange have commercial substance we need to record the gain arising from transfer of old assets

so here Gain on transfer of old assets is

Gain on transfer of old assets =  fair value of the old equipment - book value of the old equipment     ................1

Gain on transfer of old assets =  $90,000 -  $82,000

Gain on transfer of old assets = $8,000

so here correct option is B. $8,000

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Grace [21]
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Multifactor productivity:
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= 14 / $ 1,440

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4 0
4 years ago
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