Professional Documents
Culture Documents
1
Pearson Education Limited, 2015.
45) Zheng Sen's Chinese Take-Out had earnings before interest and taxes of $4,000,000 last year.
The firm has a marginal tax rate of 40 percent and currently has the following capital structure:
(a) Calculate the firm's after-tax return on equity (ROE) and earnings per share (EPS).
(b) If the firm retires $4,000,000 of preferred stock using the proceeds from an equal increase in
long-term debt, what would have been the after-tax return on equity (ROE) and earnings per
share (EPS)?
(c) If the firm retires $4,000,000 of preferred stock using the proceeds from the sale of 500,000
shares of common stock, what would have been the after-tax return on equity (ROE) and
earnings per share (EPS)?
17) If expected return is less than required return on an asset, rational investors will ________.
A) buy the asset, which will drive the price up and cause expected return to reach the level of the
required return
B) sell the asset, which will drive the price down and cause the expected return to reach the level
of the required return
C) sell the asset, which will drive the price up and cause the expected return to reach the level of
the required return
D) buy the asset, since price is expected to increase
18) If the expected return is above the required return on an asset, rational investors will
________.
A) buy the asset, which will drive the price up and cause expected return to reach the level of the
required return
B) buy the asset, which will drive the price down and cause the expected return to reach the level
of the required return
C) sell the asset, which will drive the price up and cause the expected return to reach the level of
the required return
D) sell the asset, since price is expected to decrease
50) China America Manufacturing has a beta of 1.50, the risk-free rate of interest is currently 12
percent, and the required return on the market portfolio is 18 percent. The company plans to pay
a dividend of $2.45 per share in the coming year and anticipates that its future dividends will
increase at an annual rate consistent with that experienced over the 2001-2003 period.
2
Pearson Education Limited, 2015.
3
Pearson Education Limited, 2015.