Question 1
Pace Corp.’s assets are $730,000, and its total debt outstanding is $202,000. The new CFO wants to employ a debt ratio of 60%. How much debt must the company add, without changing total assets, to achieve the target debt ratio?
◦
$217,082
◦
$225,311
◦
$236,000
◦
$240,050
Question 2
Quigley Inc. is considering two financial plans for the coming year. Management expects sales to be $386,000, operating costs to be $291,000, assets to be $300,000, and its tax rate to be 33%. Under Plan A it would use 30% debt and 70% common equity. The interest rate on the debt would be 9%, but the TIE ratio would have to be kept at 5 or more. Under Plan B the maximum debt that met the TIE ratio constraint would be employed. Assuming that sales, operating costs, assets, the interest rate, and the tax rate would all remain constant, by how much would the ROE change in response to the change in the capital structure?
◦
27.40%
◦
28.62%
◦
29.55%
◦
30.05%
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