Fast Track Inc

question 23

Essay

Fast Track 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?

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Definitions:

Vertical Intercept

The vertical intercept of a graph is the point at which the curve intersects the vertical (Y) axis, often representing the starting or base value of the function when other variables are zero.

Slope

In mathematics, the measure of the steepness or incline of a line, defined as the ratio of the vertical change to the horizontal change between two points on the line.

Positively Related

A relationship between two variables where an increase in one variable leads to an increase in the other, and a decrease in one leads to a decrease in the other.

Curve

A graphical representation showing the relationship between two or more variables on a coordinate plane.