Please answer the two questions below: Acme had a profit margin of 6.25%. a tota

Question

Please answer the two questions below:

Acme had a profit margin of 6.25%. a total assets turnover of 1.5. and an equity multiplier of 2.0. What was the firm's ROE? 0 15.23% 16.03% 16.88% 17.72% 18.75% Suppose a firm has a preferred stock that pays a $10 annual dividend (no growth expected in this payment) and currently sells for $90.00 per share. If it plans to issue more preferred shares paying the same dividend but also needs to incur a floatation cost of five percent, the firm's cost of preferred stock would be: o 7.81% o 11.70% o 11-11% o 9.10% o 9.56%

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Part A:

ROE = Margin*Turnover*Equity Multiplier = 6.25*1.5*2 = 18.75%

Option E (18.75%) is the correct answer.

Part B:

Cost of preferred stock = Annual Dividend/Stock Price after Floatation Cost = 10/(90 - 5%*90) = 11.70%

Option B (11.70%) is the correct answer.

Thanks.

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