For the Coming Year, Crane Inc

question 68

Multiple Choice

For the coming year, Crane Inc.is considering two financial plans.Management expects sales to be $301, 770, operating costs to be $266, 545, assets to be $200, 000, and its tax rate to be 35%.Under Plan A it would use 25% debt and 75% common equity.The interest rate on the debt would be 8.8%, but the TIE ratio would have to be kept at 4.00 or more.Under Plan B the maximum debt that met the TIE constraint would be employed.Assuming that sales, operating costs, assets, the interest rate, and the tax rate would all remain constant, by how much would the ROE change in response to the change in the capital structure?

• A) 3.83%
• B) 4.02%
• C) 4.22%
• D) 4.43%
• E) 4.65%

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Definitions:

Selling Price

The amount a good or service is sold for in the market.

Assessed Value

The dollar value assigned to a property for purposes of measuring applicable taxes, often determined by a public tax assessor.

Payoff

The act of completely repaying a loan, including the principal amount and any accrued interest, thereby fulfilling the borrower's obligations.

Sale

The act of selling goods or services in exchange for money or other compensation, constituting a fundamental business activity.