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Financial leverage of 34.0% and a net after-tax borrowing cost of 5% on $171.70 million

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Solar, Inc. has financial leverage of 34.0% and a net after-tax borrowing cost of 5% on $171.70 million of net debt. Its return on common equity (ROCE) is 25.1%.;a. What rate of return does this firm earn on its operations?;b. Solar, Inc. is considering repurchasing $125 million of its stock and financing the repurchase with further borrowing at a 5% after-tax borrowing cost. If the company wants to maintain the same level of operating profitability, what is the firm's return on common equity after this repurchasing?;c. If its equity traded at $19.17 per share at the end of 2005 is expected to earn $1.84 per share in 2006 and $2.10 in 2007. Solar, Inc. pays no dividends and its long-term growth rate for residual earnings equal to 4%. Given these forecasts, what is the rate of return you expect to earn from buying the shares?;d. Solar, Inc. reported its after-tax operating income of $220 million in 2005. Its net operating assets were increased from $1,885 million to $2,040 million between 2004 and 2005. During the same period, its sales revenue was increased from $4,050 million to $4,895 million. What was the normalized operating income for year 2005?

 

Paper#27026 | Written in 18-Jul-2015

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