Bank Buy Inc.is in the process of acquiring another business.In light of the acquisition,shareholders are currently re-evaluating the appropriateness of the firm's capital structure (the types of and relative levels of debt and equity).The two proposals being contemplated are detailed below:
Required:
a.Calculate the estimated return on equity (ROE)under the two proposals.(ROE = net income after taxes / market value of equity;net income after taxes = (EBIT - interest on long-term debt)× (1 - tax rate)).
b.Which proposal will generate the higher estimated ROE?
c.What is the primary benefit of leveraging an investment decision? What are two drawbacks to leveraging an investment decision?
Definitions:
Ova
The female reproductive cells in animals and plants; the plural of ovum.
X Sex Chromosome
One of the two sex chromosomes, X and Y, with individuals typically having two X chromosomes (XX) being genetically female and one X and one Y chromosome (XY) being genetically male.
Homozygous
Referring to an individual who has two identical alleles for a particular gene or genes, affecting their traits or conditions.
Mutations
changes in the DNA sequence of an organism's genome, which can result in variations in physical appearance, function, or behavior.
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