You Were Hired as the CFO of a New Company

question 82

Multiple Choice

You were hired as the CFO of a new company that was founded by three professors at your university. The company plans to manufacture and sell a new product, a cell phone that can be worn like a wrist watch. The issue now is how to finance the company, with equity only or with a mix of debt and equity. The price per phone will be $250.00 regardless of how the firm is financed. The expected fixed and variable operating costs, along with other data, are shown below. How much higher or lower will the firm's expected ROE be if it uses 60% debt rather than only equity, i.e., what is ROEL - ROEU?

• A) 5.68%
• B) 5.94%
• C) 6.22%
• D) 6.52%
• E) 6.83%

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Definitions:

Strict Liability

Legal responsibility for damages, or for performing a specific act, that is imposed without the need to prove fault or negligence.

Defective Condition

A state in which a product possesses an inherent flaw or deficiency that makes it dangerous or unfit for its intended use.

Strict Product Liability

A legal doctrine that holds sellers, manufacturers, or distributors liable for damages caused by defects in their products, regardless of fault or negligence.

Heat-Resistant Tiles

Materials designed to protect surfaces or structures from damage by high temperatures, often used in aerospace applications.