Question

Loki Revengers has expected sales of $650 million a year. Variable costs are expected to be 65 percent of sales and fixed operating costs are $200000000 a year. Total capital is presently $500000000 and must be expanded to $700000000 to generate the anticipated sales level. The company presently has no debt outstanding, and 2670000 shares of stock. Additional common stock could be sold for $150 a share. The interest rate on new debt would be 6 percent and the tax rate is 21 percent.

Required:
Compute the return on equity and earnings per share assuming the expansion is financed.

Answer 1

Answer:

the return on equity and the earning per share is 3.104% and $5.43 respectively

Explanation:

The computation of the return on equity and the earning per share is shown below:

Return on equity is

=($650 × (1 - 65%) - $200) × (1 - 21%) ÷ (700)

= 3.104%

Now  

Earning Per Share is

= ($650 × (1 - 65%) - $200) × (1 - 21%) × 10^6 ÷ (2670000 + 200 × 10^6 ÷ 150)

= $5.4267

Hence, the return on equity and the earning per share is 3.104% and $5.43 respectively