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Ryan Fitzgerald the vice president of finance for Southwest Development Company is evaluating a proposed expansion plan currently. Southwest Development has $660 million of total assets and the company's equity ratio Is 38% Southwest Development has never issued preferred shares. The company's earnings before interest and taxes (EBIT) are $83 6 million. The interest rate on their debt is 7 2% and the company's tax rate is 30%. The company is planning to expand by investing $110 million. In assets. As result both sales and EBIT will increase by 20%. The expansion will be financed with 40% debt and 60% common equity If Southwest Development proceeds with the expansion what will happen to the company's return on equally (ROE)?
- A . ROE decreases from 19.78% to 18.48%.
B. ROB increases from 14.07% to 14.12%.
C. ROE decreases from 28.25% to 26.40%.
D. ROE increases from 19.78% to 20.17%.
Suggested Answer: A
Posted : 27/12/2022 10:42 pm