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Flowers by Irene Inc. is a small company and is considering a project that will require $550,000 in assets. The project will be financed with 100% equity. The company faces a tax rate of 25%. What will be the ROE (return on equity) for this project if it produces an EBIT (earnings before interest and taxes) of $155,000?

14.80%

12.68%

21.14%

23.25%

Determine what the projects ROE will be if its EBIT is $60,000. When calculating the tax effects, assume that Flowers by Irene Inc. as a whole will have a large, positive income this year.

-6.56%

-9.84%

-7.38%

-8.2%

Flowers by Irene Inc. is also considering financing the project with 50% equity and 50% debt. The interest rate on the companys debt will be 12%. What will be the projects ROE if it produces an EBIT of $155,000?

33.27%

26.62%

36.60%

23.29%

What will be the projects ROE if it produces an EBIT of $60,000 and it finances 50% of the project with equity and 50% with debt? When calculating the tax effects, assume that Flowers by Irene Inc. as a whole will have a large, positive income this year.

-32.97%

-22.82%

-26.63%

-25.36% The use of financial leverage ____(increases/decreases)____ the expected ROE, _____(increases/decreases)_______ the probability of a large loss, and consequently ____(increases/decreases)_____ the risk borne by stockholders. The greater the firms chance of bankruptcy, the ___(lower/higher)_______ its optimal debt ratio will be. ___(A aggresive/ A conservative)_______ manager is more likely to use debt in an effort to boost profits.

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