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?
Definitions:
Shopping Products
Goods that consumers purchase after comparing quality, price, and style from various sellers, spending considerable time and effort to make the best decision.
Business Products
Goods or services that are sold to other businesses for further production, use in operations, or resale.
Convenience Products
Consumer goods or services that are widely available and can be purchased with minimal effort.
Shopping Product
Item typically purchased only after the buyer has compared competing products in competing stores.
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