Airplane Company has a cost-plus-fixed fee contract with the air force to build jets. The government will buy any additional equipment that it needs on a justified cost-savings basis.

The incremental tax rate for the company is 40%. The company has computed the following labor savings for a new equipment that costs $18334:

Period 1: Before Tax $10,000 / After tax $6,000

Period 2: Before Tax $10,000 / After tax $6,000

The company has an after-tax time value of money of 6% and the federal government has a before-tax time value of money of 5%. Should the equipment be purchased?

A COMPANY-NO; GOVT-YES

B INDETERMINATE

C COMPANY-YES; GOVT-NO

D COMPANY-YES; GOVT-YES

E COMPANY-NO; GOVT-NO

Calculate return on equity (ROE) and earnings per share (EPS) if expansion is financed by equity.

A 23.76%; $2.38

B 22%; $2.2

C 29.7%; $2.97

D 25.08%; $2.51

E 33%; $3.3

Calculate return on equity (ROE) and earnings per share (EPS) if expansion is financed by debt.

A 22%; $2.2

B 23.76%; $2.38

C 33%; $3.3

D 29.7%; $2.97

E 25.08%; $2.51

Calculate return on equity (ROE) and earnings per share (EPS) if expansion is financed by equity and debt equally.

A 25.08%; $2.51

B 22%; $2.2

C 29.7%; $2.97

D 33%; $3.3

E 23.76%; $2.38