Your Firm's Debt Ratio Is Only 5 A) 673%
B) 7

question 47

Multiple Choice

Your firm's debt ratio is only 5.00%, but the new CFO thinks that more debt should be employed. She wants to sell bonds and use the proceeds to buy back and retire common shares so the percentage of common equity in the capital structure (wc) = 1 ? wd. Other things held constant, and based on the data below, if the firm increases the percentage of debt in its capital structure (wd) to 60.0%, by how much would the ROE change, i.e., what is ROENew ? ROEOld? $$\begin{array} { l c l c } { \quad \quad\quad\quad\quad\underline{\text { Operating Data} } } & & { \quad\quad\quad\underline{\text { Other Data} } } \\\text { Capital } & \$ 150,000 & \text { Old} \mathrm {w }_ { d } & 5 \% \\ \text { ROIC = EBIT } ( 1 - \text { T) } / \text { Capital } & 13.00 \% & \text { Old interest rate } & 10 \% \\\text { Tax rate } & 35 \% & \text { New } \mathrm {w} _ { d } & 60 \% \\& & \text { New interest rate } & 12 \%\end{array}$$

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Definitions:

Duties of Insurer

The responsibilities an insurance company is bound to fulfill, including issuing policies, collecting premiums, and paying out claims.

Auto Loan

Financing specifically designed to allow individuals to purchase vehicles by borrowing money which is then paid back over time.

Loan Broker

An intermediary who assesses a borrower's needs and matches them with potential lenders, facilitating the process of obtaining a loan.

Auto Dealer

A business that sells new or used automobiles at the retail level, typically based on a dealership contract with an automaker or sales subsidiary.