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)?
(a)
* $8,000,000 × 0.12 = $960,000
** ROE = Net profits after taxes / Stockholders' equity
(where stockholders' equity includes preferred stock).
*** EPS = Earnings available to common stockholders (EAC) / Common share outstanding
(b)
(c)
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