Aurillo Equipment Company (AEC)projected That Its ROE for Next Year

question 26

Multiple Choice

Aurillo Equipment Company (AEC) projected that its ROE for next year would be just 6%.However,the financial staff has determined that the firm can increase its ROE by refinancing some high interest bonds currently outstanding.The firm's total debt will remain at $200,000 and the debt ratio will hold constant at 80%,but the interest rate on the refinanced debt will be 10%.The rate on the old debt is 14%.Refinancing will not affect sales which are projected to be $300,000.EBIT will be 11% of sales,and the firm's tax rate is 40%.If AEC refinances its high interest bonds,what will be its projected new ROE?

• A) 3.0%
• B) 8.2%
• C) 10.0%
• D) 15.6%
• E) 18.7%

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Definitions:

Microwave Ovens

Appliances that use microwave radiation to heat and cook food quickly.

Average Fixed Costs

The total fixed costs of production divided by the number of units produced, representing the per-unit fixed cost.

Microwave Ovens

Kitchen appliances that use microwave radiation to heat and cook food rapidly.

Marginal Cost

The increase in total cost that arises from producing one additional unit of a product or service.