Last Year Swensen Corp

question 54

Multiple Choice

Last year Swensen Corp.had sales of $303,225,operating costs of $267,500,and year-end assets of $195,000.The debt-to-total-assets ratio was 27%,the interest rate on the debt was 8.2%,and the firm's tax rate was 37%.The new CFO wants to see how the ROE would have been affected if the firm had used a 45% debt ratio.Assume that sales and total assets would not be affected,and that the interest rate and tax rate would both remain constant.By how much would the ROE change in response to the change in the capital structure?

• A) 2.08%
• B) 2.32%
• C) 2.57%
• D) 2.86%
• E) 3.14%

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Definitions:

Net Working Capital

It calculates the short-term liquidity of a company, highlighting the funds available to run its day-to-day operations.

Net Working Capital

The variance between current assets and liabilities within a corporation.

Capital Gains

The profit from the sale of an asset such as stocks, bonds, or real estate that exceeds its purchase price.

Marginal Tax Rates

The rate at which the last dollar of income is taxed, indicating the impact of an additional dollar of income on tax liability.