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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 an conservative policy using $6 million of short-term debt. The short-term interest rate is 7.0% and the long-term interest rate is 10.3%. What is the return on shareholders' equity (ROE) under this policy

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anthougo

Answer:

Laserscope Inc.

Return on Equity (ROE):

= $1,466,400/$18,000,000 * 100

= 8.15%

Explanation:

a) Laserscope's Return on Equity (ROE) is a financial performance measure, calculated by dividing the net income or Earnings After Tax (EAT) by its total shareholders' equity.  It is usually expressed as a percentage.  So the above calculation is further multiplied by 100.

b) Data and Calculations:

Current assets = $16

Fixed assets = $20

Total assets = $36

Debt ratio = 50%  of $36 million = $18 million

Therefore, Stockholders' equity = 50% (1 - 50%) or $18 million

EBIT = $4.1 million

Short-term debt = $6 million

Long-term debt = $12 million

Interest on short-term debt = $420,000 (7% * $6 million)

Interest on long-term debt = $1,236,000 (10.3% * $12 million)

Total interest expense = $1,656,000

Earnings before interest and taxes = $4,100,000

Interest expense                                   1,656,000

Earnings before taxes                          2,444,000

Company tax (40%)                                (977,600)

Earnings after taxes (EAT)                 $1,466,400

The return on shareholders' equity (ROE) under this policy is 8.15%.

  • The calculation is as follows;

Total assets is

= $16 million + $20 million

= $36 million

EBIT is $4.1 million

Debt ratio is 50%

The total debt is 50% of $36 billion i.e. $18 million

Less: short term debt $6 million

Long term debt $12 million

Now

EBIT $4.1 million

Less: Interest $1.656 million ((6 × 7%)+(12 × 10.3%))

EBT $2.444 million

Less: taxes $0.9776 million

Net income $1.4664 million

Now

The return on shareholder equity is

= $1.4664 ÷ $18

= 8.15%

Learn more: brainly.com/question/17429689

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