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Expected rate of return on common equity

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Wright Company has long-term assets of $21 million and common shareholder's equity of $15 million on it books thus requiring $35 million in short and/or long-term debt financing. Forecasted sales for next year are $200 million and expected EBIT profit margin is 5%. Interest rates on the company's short-term and long-term debt are 8% and 10%, respectively. Wright Company is considering an aggressive plan of debt financing consisting of $25 million in short term debt and $10 million in long-term debt.

Assuming a tax rate of 40%, what is the expected rate of return on common equity, net working capital position and current ratio?

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Solution Summary

Expected rate of return on common equity is examined for Wright Company long-term assets. The net working capital position and current ratio is computed.

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