1answer.
Ask question
Login Signup
Ask question
All categories
  • English
  • Mathematics
  • Social Studies
  • Business
  • History
  • Health
  • Geography
  • Biology
  • Physics
  • Chemistry
  • Computers and Technology
  • Arts
  • World Languages
  • Spanish
  • French
  • German
  • Advanced Placement (AP)
  • SAT
  • Medicine
  • Law
  • Engineering
djyliett [7]
3 years ago
5

Pendergast, Inc., has no debt outstanding, and has a total market value of $180,000. Earnings before interest and taxes (EBIT) a

re projected to be $23,000 if economic conditions are normal. If there is a strong expansion in the economy, then EBIT will be 20% higher. If there is a recession, then EBIT will be 30% lower. Pendergast is considering a $75,000 debt issue with a 7% interest rate. The proceeds will be used to repurchase shares of stock. There are currently 6,000 shares of stock outstanding, and the relevant tax rate is 35%.
Required:

(a) Calculate the return on equity (ROE) under each of the three economic scenarios before any debt is issued. (Round your answers to 2 decimal places. (e.g., 32.16)).

(b) Calculate the percentage changes in ROE when the economy expands or enters a recession. (Negative amounts should be indicated by a minus sign.)
Business
1 answer:
Lady_Fox [76]3 years ago
4 0

Answer:

return on equity (ROE) = net income / shareholders' equity

shareholders' equity = $180,000

economic scenarios:

  1. normal ⇒ EBIT = $23,000
  2. economic expansion ⇒ EBIT = $27,600
  3. economic recession ⇒ EBIT = $16,100

additionally, $75,000 in debt will be used to repurchase stocks, so shareholders' equity = $180,000 - $75,000 = $105,000

interest on the loan = $75,000 x 7% = $5,250

tax rate = 35%

net income in 3 economic scenarios:

  1. normal ⇒ ($23,000 - $5,250) x 0.65 = $11,537.50
  2. economic expansion ⇒ ($27,600 - $5,250) x 0.65 = $14,527.50
  3. economic recession ⇒ ($16,100 - $5,250) x 0.65 = $7,052.50

A) ROE under 3 different economic scenarios:

  1. normal = $11,537.50 / $105,000 = 10.99%
  2. economic expansion = $14,527.50 / $105,000 = 13.84%
  3. economic recession = $7,052.50 / $105,000 = 6.72%

B)

When the economy expands, the ROE will increase by 11.46% compared to the normal economic activity [= (13.84% - 10.99%) / 10.99%]

When the economy enters a recession, the ROE will decrease by -38.85% compared to the normal economic activity [= (6.72% - 10.99%) / 10.99%]

You might be interested in
Dimitri owns stock in a u.s. publicly traded company. as a stockholder, dimitri is a(n) ______ of the corporation.
Monica [59]

Based on the fact that Dimitri owns stock in a company in the United States which is publicly traded, he is a stockholder which makes him an <u>owner </u>of the corporation.

<h3>What is Dimitri to the company?</h3>

Dimitri is considered to be an owner of the company because owning a share in a company means that you have ownership rights to their stock.

This is called equity ownership and it is the type of ownership that is seen with publicly traded companies such as the one that Dimitri bought shares in.

Because he is a shareholder and therefore an owner, Dimitri has the right to attend annual general meetings and voice his opinion. He also stands to make a capital gain if the share price of the corporation rises.

In conclusion, Dimitri is an owner.

Find out more on publically traded companies at brainly.com/question/14227507

#SPJ1

3 0
2 years ago
Paid $7,000 of accrued taxes at the time the plant site was acquired. choose an account title 2. Paid $200 insurance to cover a
xenn [34]

Answer: Please refer to Explanation

Explanation:

Hello. Your question was not complete as it lacked certain options.

I have attached it to this answer.

1.Paid $7,000 of accrued taxes at the time the plant site was acquired. LAND because it was an expense that was needed to acquire the land so it is capitalized

2. Paid $200 insurance to cover a possible accident loss on new factory machinery while the machinery was in transit. EQUIPMENT

3. Paid $850 sales taxes on a new delivery truck. EQUIPMENT.

4. Paid $21,000 for parking lots and driveways on the new plant site. choose an account title. LAND IMPROVEMENTS.

5. Paid $250 to have the company name and slogan painted on the new delivery truck. choose an account title. EQUIPMENT

6. Paid $8,000 for installation of new factory machinery. choose an account title. EQUIPMENT

7. Paid $900 for a 2-year accident insurance policy on the new delivery truck. choose an account title. PREPAID INSURANCE

8. Paid $75 motor vehicle license fee on the new truck. LICENSE EXPENSE.

4 0
3 years ago
Pros and cons on outdoor advertising
Mademuasel [1]
If I'm correct-- by outdoor advertising do you mean commercials and ads encouraging people to go outside?
7 0
3 years ago
The process that falls between buying for a new need and making a routine repurchase is called
Archy [21]

Answer:

Modified Rebuy

Explanation:

Modified rebuying is the process whereby an individual or an organization makes a purchase that have been previously purchased but this times makes changes to some elements different from the previous purchase like change of suppliers, terms, price and so on. In this case, the buyer reviews the buying situation. Here, the buyer is interested in modifying the specifications of goods previously purchased.

7 0
3 years ago
The board of directors declared cash dividends totaling $585,000 during the current year. The comparative balance sheet indicate
Lelechka [254]

Answer:

$606,375

Explanation:

The computation of the amount of cash payments to stockholders is shown below:

= Beginning dividend payable  + cash dividend declared - ending dividend payable

= $167,625 + $585,000 - $146,250

= $606,375

We simply added the dividend declared amount and deducted the ending dividend payable to the beginning dividend payable so that the accurate amount can come.

5 0
3 years ago
Other questions:
  • Products whose demand rises when another product’s price increases are called
    14·2 answers
  • Jeeves consulting requires a performance evaluation method that is less time consuming to develop and administer and allows for
    10·1 answer
  • Ignatius Inc., a lock manufacturer, is a part of a national program in which employers encourage disabled workers to work with e
    5·1 answer
  • Genepa Corporation manufactures home appliances and other electronic products. Genepa is planning to introduce a new refrigerato
    7·1 answer
  • The return on shareholders' equity for... Income statement: 2018 Sales $ 2,500,000 Cost of goods sold 1,300,000 Net income 200,0
    6·1 answer
  • Value a Constant Growth Stock Financial analysts forecast Best Buy Company (BBY) growth for the future to be 14.00 percent. Thei
    14·1 answer
  • Elm Company's accounting records reflect the following inventories: Dec. 31, 2020 Dec. 31, 2019 Raw materials inventory $420,000
    11·1 answer
  • 11
    9·1 answer
  • A firm is considering moving from the United States to Mexico. The firm pays its U.S. workers $30.00 per hour. Currently, U.S. w
    10·1 answer
  • The capital investment evaluation method that subtracts the initial investment from the discounted future net cash flows from th
    11·1 answer
Add answer
Login
Not registered? Fast signup
Signup
Login Signup
Ask question!