Snow and Skates Ltd is planning a $500,000 expansion.The firm has $1,000,000 in equity.Which of the following options would generate the largest return on equity?

Question

Quizplus · Accepted Answer

Option C (issuing $500,000 worth of 8% bonds) would generate the largest return on equity, as the interest rate on the bonds is lower than the return the company expects to generate from the expansion. By leveraging debt, the company can achieve a higher return on the $500,000 investment than if it were to finance the expansion solely with equity. Option B is not as favorable, as the company would have to issue additional shares, diluting existing shareholders' ownership and potentially decreasing the return on equity. Option A would result in no return on equity from the expansion.

Snow and Skates Ltd Is Planning a $500,000 Expansion