You Were Hired as the CFO of a New Company

question 30

Multiple Choice

You were hired as the CFO of a new company that was founded by three professors at your university. The company plans to manufacture and sell a new product, a cell phone that can be worn like a wrist watch. The issue now is how to finance the company, with equity only or with a mix of debt and equity. The price per phone will be $250.00 regardless of how the firm is financed. The expected fixed and variable operating costs, along with other data, are shown below. How much higher or lower will the firm's expected ROE be if it uses 60% debt rather than only equity, i.e., what is ROEL ? ROEU? $\begin{array}{lrr}&\underline{0 \% \text { Debt, } \mathrm{U} }& \underline{60 \% \text { Debt. }}\\\text { Expected unit sales (Q) } & 28,500 & 28,500 \\\text { Price per phone (P) } & \$ 250.00 & \$ 250.00 \\\text { Fixed costs (F) } & \$ 1,000,000 & \$ 1,000,000 \\\text { Variable cost/unit (V) } & \$ 200.00 & \$ 200.00 \\\text { Required investment } & \$ 2,500,000 & \$ 2,500,000 \\\% \text { Debt } & 0.00 \% & 60.00 \% \\\text { Debt, \$ } & \$ 0 & \$ 1,500,000 \\\text { Equity, \$ } & \$ 2,500,000 & \$ 1,000,000 \\& & \\\text { Interest rate } & \mathrm{NA} & 10.00 \% \\\text { Tax rate } & 35.00 \% & 35.00 \%\end{array}$

• A) 5.68%
• B) 5.94%
• C) 6.22%
• D) 6.52%
• E) 6.83%

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Definitions:

Similar Motivations

Describes the common driving forces or desires behind individuals' behaviors and actions.

Bicultural Identity Integration (BII)

The process by which individuals who are exposed to and influenced by two cultures integrate these influences into their identity, including how these aspects interact and are reconciled within the self.

Bicultural Individuals

People who integrate elements from two distinct cultures within their daily lives, navigating and blending cultural identities and practices.

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Traits or characteristics that are shaped in part by an individual's genetic makeup, affecting physical, behavioral, and psychological features.