Question

1) Firm A and Firm B are nearly identical firms except for their capital structures. Firm...

1) Firm A and Firm B are nearly identical firms except for their capital structures. Firm A is financed entirely with equity. Firm B finances 50% of its assets with debt, which has an 8% interest rate. Both firms have $1 million of assets, a basic earning power (BEP) ratio of 20%, and a 40% tax rate. Compute the return on equity, ROE, for both firms.

2)Loowie Mining Corp. has $9 million in sales, its ROE is 12%, and its total assets turnover is 3.6x. The company’s debt-equity ratio is 1.0, and it has no preferred stock outstanding. What is its net income?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
ABC and XYZ are identical firms in all respects except for their capital structures. ABC is...
ABC and XYZ are identical firms in all respects except for their capital structures. ABC is all-equity financed with $530,000 in stock. XYZ has the same total value but uses both stock and perpetual debt; its stock is worth $310,000 and the interest rate on its debt is 7.9 percent. Both firms expect EBIT to be $62,222. Ignore taxes. The cost of equity for ABC is _____ percent and for XYZ it is ______ percent. Select one: 11.74; 9.82 11.74;...
Show Excel Equations for credit Firms HD and LD are identical except for their level of...
Show Excel Equations for credit Firms HD and LD are identical except for their level of debt and the interest rates they pay on debt--HD has more debt and pays a higher interest rate on that debt. Based on the data given below, what is the difference between the two firms' ROEs? (Answer by calculating HD's ROE and LD' ROE). (Hint: You need to find Equity and NI of the two firms to obtain ROE (=NI/EQUITY)) Applicable to Both Firms...
Delta Mills and Franklin Mills are identical firms except for their capital structures. Delta is an...
Delta Mills and Franklin Mills are identical firms except for their capital structures. Delta is an unlevered firm with $680,000 of equity. Franklin is a levered firm. Both Delta and Franklin have an expected EBIT of $84,000. Delta Mills has a ________ WACC than Franklin Mills and a ______ firm value compared to Franklin. A. lower; lower B. higher; higher C. lower; higher D. higher; lower
Assume that two firms, A and B, are identical in all respects except that Firm A...
Assume that two firms, A and B, are identical in all respects except that Firm A is debt free and Firm B has a capital structure that is 50 percent debt and 50 percent equity by market value. Further suppose that the assumptions of the Modigliani & Miller capital structure irrelevance proposition holds (i.e. no taxes or transactions costs, no bankruptcy costs, etc.) and that each firm will have net operating income (EBIT) of $800,000. The required return on assets,...
Assume that two firms, A and B, are identical in all respects except that Firm A...
Assume that two firms, A and B, are identical in all respects except that Firm A is debt free and Firm B has a capital structure that is 50 percent debt and 50 percent equity by market value. Further suppose that the assumptions of the Modigliani & Miller capital structure irrelevance proposition holds (i.e. no taxes or transactions costs, no bankruptcy costs, etc.) and that each firm will have net operating income (EBIT) of $800,000. The required return on assets,...
Firms HL and LL are identical except for their financial leverage ratios and the interest rates...
Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $27 million in invested capital, has $5.4 million of EBIT, and is in the 40% federal-plus-state tax bracket. Firm HL, however, has a debt-to-capital ratio of 60% and pays 11% interest on its debt, whereas LL has a 40% debt-to-capital ratio and pays only 8% interest on its debt. Neither firm uses preferred stock in its capital structure....
Firms HL and LL are identical except for their financial leverage ratios and the interest rates...
Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $15 million in invested capital, has $2.25 million of EBIT, and is in the 40% federal-plus-state tax bracket. Firm HL, however, has a debt-to-capital ratio of 55% and pays 11% interest on its debt, whereas LL has a 20% debt-to-capital ratio and pays only 8% interest on its debt. Neither firm uses preferred stock in its capital structure....
Alpha and Beta Corp. are identical in every way except their capital structures. Alpha Corp. an...
Alpha and Beta Corp. are identical in every way except their capital structures. Alpha Corp. an all equity firm, has 13,000 shares of stock outstanding, currently worth $20 per share. Beta Corp. uses leverage in its capital structure. The market value of Beta's debt is $63,000 and its cost of debt is 8%. Each firm is expected to have earnings before interest of $73,000 in perpetuity. Neither firm pays taxes. Assume that every investor can borrow at 8% per year....
INANCIAL LEVERAGE EFFECTS Firms HL and LL are identical except for their financial leverage ratios and...
INANCIAL LEVERAGE EFFECTS Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $24 million in invested capital, has $3.6 million of EBIT, and is in the 40% federal-plus-state tax bracket. Firm HL, however, has a debt-to-capital ratio of 55% and pays 12% interest on its debt, whereas LL has a 20% debt-to-capital ratio and pays only 8% interest on its debt. Neither firm uses preferred stock in...
FINANCIAL LEVERAGE EFFECTS Firms HL and LL are identical except for their financial leverage ratios and...
FINANCIAL LEVERAGE EFFECTS Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $13 million in invested capital, has $3.25 million of EBIT, and is in the 40% federal-plus-state tax bracket. Firm HL, however, has a debt-to-capital ratio of 60% and pays 11% interest on its debt, whereas LL has a 35% debt-to-capital ratio and pays only 10% interest on its debt. Neither firm uses preferred stock in...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT