(a) ABC is an all-equity financed firm with total asset of 200m. Corporate tax rate is 20%. The EBIT in the bad, normal and good year scenarios are 8 million, 12 million and 16 million respectively. Given that XYZ is an otherwise identical firm, but with 50m of its 200m assets financed with debt bearing an interest rate of 2%, calculate the ROE under the three scenarios for both firms.

(b) Briefly discuss whether the volatility of ROE matters to investors in light of

the results obtained for (a).