Answer Happy

Tim Powers has expected sales of $5 million a year. Variable costs are expected to be 60 percent of sales and fixed operating costs are $950000 a year. Total capital is presently $1200000 and must be expanded to $2000000 to generate the anticipated sales level. The company presently has no debt outstanding, and 60000 shares of stock. Additional common stock could be sold for $10 a share. The interest rate on new debt would be 6 percent and the tax rate is 30 percent. Compute the return on equity and earnings per share assuming the expansion is financed: Sales of $5 million, Var cost of 60% of sales, Fixed cost of $950000 per year, new capital needed $800000 ($2000000 - $1200000), number of shares 60000 shares, stock price of $10, interest expense of 6%, tax of 30%, assume no preferred dividends. a. exclusively with debt, b. exclusively with equity and c. with one-half debt and one-half equity. Calculate return on equity (ROE) and earnings per share (EPS) if expansion is financed by debt. 58.45%: $11.69 61.25%: $12.25 43.84%; $7.01 36.75%; $5.25 45.41%; $7.27