Question
a. Nodebt is a company with total assets of $100M and pays corporate taxes at the rate of 30%. Nodebt generates EBITs of $5M, $10M,
a. Nodebt is a company with total assets of $100M and pays corporate taxes at the rate of 30%. Nodebt generates EBITs of $5M, $10M, $15M in a bad year, a normal year, and a good year respectively. Calculate the rate of return on equity of Nodebt in the three scenarios.
b. Somedebt is an identical company except that $50M of its $100M total assets is financed with debt bearing an interest rate of 8%. Calculate the rate of return on equity of Somedebt in the three scenarios of earnings.
c. Which company among the two has riskier equity to be invested in?
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