Your Company,which Is Financed Entirely with Common Equity,plans to Manufacture

question 34

Multiple Choice

Your company,which is financed entirely with common equity,plans to manufacture a new product,a cell phone that can be worn like a wristwatch.Two robotic machines are available to make the phone,Machine A and Machine B.The price per phone will be $250.00 regardless of which machine is used to make it.The fixed and variable costs associated with the two machines are shown below,along with the capital (all equity) that must be invested to purchase each machine.The expected sales level is 25,000 units.Your company has tax loss carry-forwards that will cause its tax rate to be zero for the life of the project,so T = 0.How much higher or lower will the project's ROE be if you select the machine that produces the higher ROE,i.e.,what is ROE_B − ROE_A? (Hint: Since the firm uses no debt and its tax rate is zero,ROE = EBIT/Required investment.)

• A)6.00%
• B)6.67%
• C)7.00%
• D)7.35%
• E)7.72%

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Definitions:

Organizational Structure

The system that outlines how certain activities are directed to achieve the goals of an organization, including rules, roles, and responsibilities.

Excess Plant Capacity

A situation where a company's production facilities have more production capabilities than currently needed for its level of production.

Stockholders' Approval

The formal consent given by shareholders, often required for significant company actions like mergers, acquisitions, or changes in corporate structure.

Organizational Structure

The way in which a company or organization is arranged, including its hierarchy, departmentalization, and roles.