For the Coming Year, Crane Inc

question 91

Multiple Choice

For the coming year, Crane Inc.is considering two financial plans.Management expects sales to be $301,770, operating costs to be $266,545, assets to be $200,000, and its tax rate to be 25%.Under Plan A it would use 25% debt and 75% common equity.The interest rate on the debt would be 8.8%, but the TIE ratio would have to be kept at 4.00 or more.Under Plan B the maximum debt that met the TIE constraint would be employed.Assuming that sales, operating costs, assets, the interest rate, and the tax rate would all remain constant, by how much would the ROE change in response to the change in the capital structure?

• A) 4.42%
• B) 4.64%
• C) 4.87%
• D) 5.11%
• E) 5.37%

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Definitions:

Confederates

Individuals who appear to be participants in a study but are actually part of the research team, used to manipulate social interactions.

Self-Fulfilling Prophecy

A prediction that directly or indirectly causes itself to become true, due to positive feedback between belief and behavior.

Diffusion Of Responsibility

A sociopsychological phenomenon where individuals are less likely to take action or feel a sense of responsibility in the presence of a large group of people.

Likert Scale

A psychometric scale commonly used in questionnaires to gauge attitudes, values, or responses, where participants specify their level of agreement to a statement.