Robertson Steel Is Forecasting the Following Numbers: EBIT $1,000,000

question 54

Multiple Choice

Robertson Steel is forecasting the following numbers: EBIT $1,000,000
Interest Expense 300,000
ROE 20%
The company is in the 40 percent tax bracket. After putting together the forecast the company is considering a proposal from its CFO (Chief Financial Officer) which calls for an increase in the company's debt ratio. If the CFO's policy is adopted, the company will reduce the number of common shares by 25 percent and increase its interest expense by 20 percent. What will be the company's forecasted ROE if the company adopts the CFO's recommendation? (Assume that the change in financing has no impact on EBIT.)

• A) 15.00%
• B) 18.75%
• C) 20.00%
• D) 24.38%
• E) 26.44%

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Definitions:

Diminishing Returns

The principle stating that if one factor of production is increased while others remain constant, the overall returns will eventually decrease after a certain point.

Marginal Cost Curve

A graphical representation showing how the cost of producing one additional unit of a good changes as the production volume varies.

Total Product

The overall quantity of output that a firm produces, typically measured within a specific time period under given levels of input.

Marginal Cost

The additional cost incurred in the production of one more unit of a good or service.