Zheng Sen's chinese take out had earnings before interest and taxes of 4,000,000

Zheng Sen's chinese take out had earnings before interest and taxes of 4,000,000 last year. The firm has a marginal tax rate of 40% and currently has the following capital structure:

Long term debt at 12% with an amount of 8,000,000 and total capital percentage of 25% Preferred stock at 14% with an amount of 800,000 and total capital percentage of 25% Common stock equity 2000000 shares outstanding for an amount of 16,000,000 and tot cap percentage of 50

Questions

a. Calculate the firm's after tax ROE and EPS.
b. If the firm retires 4,000,000 of preferred stock using the proceeds from an equal increase in long term debt, what would have been the after tax ROE and EPS?
c. If the firm retires 4,000,000 of preferred stock using the proceeds from the sale of 500,000 shares of common stock, what would have been the after tax ROE and EPS?
 

SOLUTION PREVIEW

a)

	Amount
Earnings befor interest and taxes	4,000,000
Less Interest (8,000,000 x 12%)	-960000
Earnings before taxes	3,040,000
Less Taxes (40%)	-1216000
Earnings after taxes	1,824,000

File name Zheng Sens.xls File type: xls  PRICE:$12