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Your Company, Which Is Financed Entirely with Common Equity, Plans

question 65

Multiple Choice

Your company, which is financed entirely with common equity, plans to manufacture a new product, a cell phone that can be worn like a wristwatch. Two robotic machines are available to make the phone, Machine A and Machine B. The price per phone will be $250.00 regardless of which machine is used to make it. The fixed and variable costs associated with the two machines are shown below, along with the capital (all equity) that must be invested to purchase each machine. The expected sales level is 25,000 units. Your company has tax loss carry-forwards that will cause its tax rate to be zero for the life of the project, so T = 0. How much higher or lower will the project's ROE be if you select the machine that produces the higher ROE, i.e., what is ROEB - ROEA? (Hint: Since the firm uses no debt and its tax rate is zero, ROE = EBIT/Required investment.)

Definitions:

Negative Phrase

A linguistic expression that conveys denial, disagreement, or pessimism, often influencing the tone or mood of a conversation.

Bad-News Message

A type of communication designed to deliver unfavorable news in a tactful manner to mitigate negative reactions.

Direct Approach

A communication style where the main point or purpose is presented at the beginning, followed by supporting details or arguments.

Indirect Approach

A communication strategy that involves presenting background information before getting to the main point, often used to soften negative news or messages.