Laserscope Inc.is trying to determine the best combination of short-term and long-term debt to employ in financing its assets.Laserscope will have $16 million in current assets and $20 million in fixed assets next year and expects operating income (EBIT) to be $4.1 million.The company's tax rate is 40% and its debt ratio is 50%.The firm's debt will be financed by one of the following policies:

What is the return on shareholder's equity under each policy?
A)aggressive = 12.70% & conservative = 12.22%
B)aggressive = 8.47% & conservative = 8.14%
C)aggressive = 4.23% & conservative = 4.07%
D)aggressive = 7.67% & conservative = 8.81%

Question

Laserscope Inc.is trying to determine the best combination of short-term and long-term debt to employ in financing its assets.Laserscope will have $16 million in current assets and $20 million in fixed assets next year and expects operating income (EBIT) to be $4.1 million.The company's tax rate is 40% and its debt ratio is 50%.The firm's debt will be financed by one of the following policies:

What is the return on shareholder's equity under each policy?

What is the return on shareholder's equity under each policy?
A)aggressive = 12.70% & conservative = 12.22% 
B)aggressive = 8.47% & conservative = 8.14% 
C)aggressive = 4.23% & conservative = 4.07% 
D)aggressive = 7.67% & conservative = 8.81%

Quizplus · Accepted Answer

Aggressive Conservative
EBIT $ 4.100 $ 4.100
I 1.560 1.656
EBT 2.540 2.444
T 1.016 0.978
EAT $1.524 $1.466
ROE 8.47% 8.14%