Laserscope Inc ? What Is the Return on Shareholder's Equity Under Each

question 9

Multiple Choice

Laserscope Inc. is trying to determine the best combination of short-term and long-term debt to employ in financing its assets. Laserscope will have $16 million in current assets and $20 million in fixed assets next year and expects operating income (EBIT) to be $4.1 million. The company's tax rate is 40%, and its debt ratio is 50%. The firm's debt will be financed by one of the following policies: $\begin{array}{lcll}& \text { Amount of } & \text { Interestrate } \\\text { Financing policy } & \text { Short-term debt } & \text { LTD }(\%) & \text { STD }(\%) \\\text { Aggressive } & \$ 12 & 11.0 & 7.5 \\\text { Conservative } & 6 & 10.3 & 7.0\end{array}$ ? What is the return on shareholder's equity under each policy?

• A) aggressive = 12.70% and conservative = 12.22%
• B) aggressive = 8.47% and conservative = 8.14%
• C) aggressive = 4.23% and conservative = 4.07%
• D) aggressive = 7.67% and conservative = 8.81%

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Definitions:

Normal Distribution

A bell-shaped curve which describes the spread of a characteristic throughout a population, where most occurrences take place around the central peak and probabilities for values taper off equally towards both tails.

Symmetry

Symmetry in statistics refers to a situation where the two halves of a distribution mirror each other across a central point.

Modality

Refers to the manner or mode in which something exists or is experienced or expressed.

Normal Distributions

A symmetric probability distribution around the mean, demonstrating that frequencies decrease as distances from the mean increase.