Question

567 4.14 Pacific Packaging's ROE last year was only 4%; but its management has developed a new operating plan that calls for a debt-to-capital ratio of 45%, which will result in a $540,000. The firm has no plans to use preferred stock and total assets equal total invested capital. Management projects an EBIT of $1,278,000 on sales of $18,000,000, and it expects to have a total assets turnover ratio of 3.6. Under these conditions, the tax rate will be 35%. If the changes are made, what will be the company's return on equity? Do not round intermediate calculations. Round your answer to two decimal places. I 4.16 Commonwealth Construction (CC) needs $3 million of assets to get started, and it expects to have a basic earning power ratio of 20%. CC will own no securities, so all of its income will be operating income. If it so chooses, CC can finance up to 55% of its assets with debt, which will have an 10% interest rate. If it chooses to use debt, the firm will finance using only debt and common equity, so no preferred stock will be used. Assuming a 35% tax rate on all taxable income, what is the difference between CC's expected ROE if it finances these assets with 55% debt versus its expected ROE iFit finances these assets entirely with common stock? Round your answer to two decimal places.

please answer both questions

Answer 1

(4.14) Total Assets = Total Invested Capital, Debt to Capital Ratio = 45 %, Sales = $ 18000000, Interest Expense = $ 540000, EBIT = $ 1278000, Tax Rate = 35 %

EBIT = $ 1278000

Less: $ 540000

Profit Before Tax (PBT) = $ 738000

Less: Tax Expense @ 35 % = 0.35 x 738000 = $ 258300

Net Income = $ 479700

Asset Turnover Ratio = 3.6, Financial Multiplier = Total Assets / Equity = 1/0.55 = 1.8182

Return on Equity = Net Profit Margin x Asset Turnover Ratio x Financial Multiplier = (Net Income / Sales) x (3.6) x (1.8182) = (479700 / 18000000) x (3.6) x (1.8182) = 0.17444 or 17.444 % ~ 17.44 %

NOTE: Please raise a separate query for the solution to the second unrelated question as one query is restricted to the solution of only one complete question with up to four sub-parts.