A Firm Has Total Assets of $1,000,000 and a Debt

question 51

Multiple Choice

A firm has total assets of $1,000,000 and a debt ratio of 30 percent. Currently, it has sales of $2,500,000, total fixed costs of $1,000,000, and EBIT of $50,000. If the firm's before-tax cost of debt is 10 percent and the firm's tax rate is 40 percent, what is the firm's ROE?

• A) 1.7%
• B) 2.5%
• C) 6.0%
• D) 8.3%
• E) 9.8%

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Definitions:

Liquidating Dividend

A type of dividend paid by a company to its shareholders from its capital base, effectively returning a portion of the original investment back to the shareholders.

Capital Dividend

A dividend paid to shareholders from a company's capital rather than its earnings, often tax-exempt for the receiver.

Dividend Policy

The strategy a company uses to decide how much it will pay out to shareholders in dividends.

Legal Requirements

Mandates established by law that must be followed by individuals, organizations, or businesses.