Problem:
Sims Corp. will buy back 900 of its 2500 shares outstanding. The return on equity before the buy-back is 14%. The debt-to-equity ratio before the buy-back is 1. Also, the company plans to keep a constant debt level, with an interest rate of 3%. Assume no taxation and perfect capital markets.
Required:
Question: What will be the new return on equity after the buy-back?
Note: Explain in detail and show all computations in proper way.