Business and Financial Risk of Assets
Understanding Business and Financial Risk of Assets
The two firms have the same level of total assets and expected net operating profit after tax (NOPAT)
But they differ on two critical characteristics: Total Debt and standard deviation of expected NOPAT. The information below outlines some of the Company A and Company B characteristics.
Company A: Company B
Total Assets $5,200.00 $5,200.00
Total Debt $1,196,000 $2,340.00
Expected NOPAT $1,248.00 $1,248.00
Standard Deviation of expected NOPAT $348, 00 $223,600
Which Company has more Business Risk?
Which Firm has more financial Risk?
2. Project will require 400,000 in assets
. The Project is expected to produce an EBIT of 50,000.
. The project will be financed with 100% equity
. There will be 25,000 shares of common equity outstanding
. The company faces a tax rate of 30%
3.What will the ROE for this project? A. 8.31% B. 7.44%, C. 8.75% D. 7.00%
4.What will the EPS will be if finances the project with 100% equity? $1.12,1.47,1.33,1.19,1.40
5.Same Project is being financed with 50% debt and 50% equity. The interest rate on the debt will be 13%. Only 50% of project is financed with equity, it will only have 12,500 shares outstanding. What will be the ROE on this project if the company decides to finance with 50% debt and 50% equity?
a. 8.40%
b. 8.82%
c. 9.66%
d. 10.08%
6. What is the EPS? $1.61, 1.47, 1.07,1.27,1.347. Using this financial leverage will _______________projects ROE
a. Increase
b. decrease
