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:
Requirements:
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)× (I - tax rate).)
b.Which proposal will generate the higher estimated ROE?
Definitions:
Graduated Commission
A commission structure where the rate of commission increases with the level of sales or transactions completed.
Average Rate
The mean value of rates over a specified period or under certain conditions.
Mortgage Rate
The interest rate charged on a mortgage, typically expressed as an annual percentage.
GST
Goods and Services Tax, a type of value-added tax imposed on the majority of goods and services that are sold within the country for local use.
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