Universal Inc.is in the process of acquiring another business.In light of the acquisition,shareholders are currently re-evaluating the appropriateness of the firm's capital structure (the types of and relative levels of debt and equity).The two proposals being contemplated are detailed below:

Required:
a.Calculate the estimated return on equity (ROE)under the two proposals.(ROE = net income after taxes / market value of equity;net income after taxes = (EBIT - interest on long-term debt)× (1 - tax rate)).
b.Which proposal will generate the higher estimated ROE?

Question

Universal Inc.is in the process of acquiring another business.In light of the acquisition,shareholders are currently re-evaluating the appropriateness of the firm's capital structure (the types of and relative levels of debt and equity).The two proposals being contemplated are detailed below:
  
Required:
a.Calculate the estimated return on equity (ROE)under the two proposals.(ROE = net income after taxes / market value of equity;net income after taxes = (EBIT - interest on long-term debt)× (1 - tax rate)).
b.Which proposal will generate the higher estimated ROE?

Quizplus · Accepted Answer

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