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Ridgefield Enterprises: ROA and ROE

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Ridgefield Enterprises has total assets of $300 million and EBIT of $45 million. The company currently has no debt in its capital structure. The company is contemplating a recapitalization where it will issue debt at 10 percent and use the proceeds to buy back shares of the company's common stock. If the company proceeds with the recapitalization, its operating income, total assets, and tax rate will remain the same. Which of the following will occur as a result of the recapitalization?

a. The company's ROA and ROE will increase
b. The company's ROA and ROE will decrease.
c. The company's ROA will decrease and ROE will increase
d. The company's ROA will increase and ROE will decrease
e. Can't tell without knowing more information.

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F_U10_38-42: Brandi Co, Ridgefield, value of investment, monthly payments, interest

38.
Brandi Co. has an unlevered beta of 1.10. The firm currently has no debt, but is considering changing its capital structure to be 30% debt and 70% equity. If its corporate tax rate is 40%, what is Brandi's levered beta?

1.2549
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1.5764
1.6235
1.7458

39.
Ridgefield Enterprises has total assets of $300 million. The company currently has no debt in its capital structure. The company's basic earning power is 15%. The company is contemplating a recapitalization where it will issue debt at 10% and use the proceeds to buy back shares of the company's common stock. If the company proceeds with the recapitalization, its operating income, total assets, and tax rate will remain the same. Which of the following will occur as a result of the recapitalization?

The company's ROA will increase.
The company's ROA will remain unchanged.
The company's basic earning power will decline.
The company's basic earning power will increase.
The company's ROE will increase.

40.
You are analyzing the value of an investment by calculating the present value of its expected cash flows. Which of the following would cause the investment to look better?

The discount rate decreases.
The cash flows are extended over a longer period of time, but the total amount of the cash flows remains the same.
The discount rate increases.
The riskiness of the project's cash flows increases.
The total amount of cash flows remains the same, but more of the cash flows are received in the later years and less are received in the earlier years.

41.
You are considering buying a new, $15,000 car, and you have $2,000 to put toward a down payment. If you can negotiate a nominal annual interest rate of 10% and finance the car over 60 months, what are your monthly car payments?

$216.67
$252.34
$276.21
$285.78
$318.71

42.
Elizabeth has $35,000 in an investment account, but she wants the account to grow to $100,000 in 10 years without making any additional contributions to the account. What effective annual rate of interest does she need to earn on the account to meet her goal?

9.03%
11.07%
10.23%
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12.32%

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