Last Year Hamdi Corp

question 64

Multiple Choice

Last year Hamdi Corp. had sales of $500,000, operating costs of $450,000, and year-end assets of $395,000. The debt-to-total-assets ratio was 17%, the interest rate on the debt was 7.5%, and the firm's tax rate was 35%. The new CFO wants to see how the ROE would have been affected if the firm had used a 50% debt ratio. Assume that sales, operating costs, total assets, and the tax rate would not be affected, but the interest rate would rise to 8.0%. By how much would the ROE change in response to the change in the capital structure?

• A) 1.71%
• B) 1.90%
• C) 2.11%
• D) 2.34%
• E) 2.58%

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Definitions:

Straight-Line Basis

A method of calculating depreciation or amortization by evenly allocating the cost of an asset over its useful life.

Salvage Value

The estimated value remaining in an asset after it has served its purpose.

Depreciation Expense

The systematic allocation of the cost of a tangible asset over its useful life, reflecting its consumption, wear and tear, or obsolescence.

Useful Life

The estimated time period that an asset is expected to be usable, contributing to the revenue-generating activities of a business.