Blue Corp Is in the Process of Acquiring Another Business

question 70

Essay

Blue Corp 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?

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Definitions:

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