I got the following question:
Manufacturing Corporation (MC) is going to raise $5 million in capital for an expansion of its plant. They presently have no debt and have determined that their present return on equity is 12 percent and earnings per share are $7.00. No income tax is paid. Based on the following data, what would be the new return on equity if MC raised the needed capital through a $5 million bond issue at 10 percent interest?
Present Earnings $2,000,000
Present Equity $10,000,000
Outstanding Shares 200,000 Shares
Choose one answer.
A. 5 percent
B. 10 percent
C. 15 percent
D. 20 percent
The correct answer according to them is 15%. I figure they get that by doing: (2,000,000-0.1*5,000,000)/10,000,000, is this correct?
How could the PRESENT return on equity be 12%? wouldnt it be 20%?
Manufacturing Corporation (MC) is going to raise $5 million in capital for an expansion of its plant. They presently have no debt and have determined that their present return on equity is 12 percent and earnings per share are $7.00. No income tax is paid. Based on the following data, what would be the new return on equity if MC raised the needed capital through a $5 million bond issue at 10 percent interest?
Present Earnings $2,000,000
Present Equity $10,000,000
Outstanding Shares 200,000 Shares
Choose one answer.
A. 5 percent
B. 10 percent
C. 15 percent
D. 20 percent
The correct answer according to them is 15%. I figure they get that by doing: (2,000,000-0.1*5,000,000)/10,000,000, is this correct?
How could the PRESENT return on equity be 12%? wouldnt it be 20%?
Question on the SMART practice exam
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