1. Firm A is very aggressive in its use of debt to leverage up its earnings for common stockholders, whereas Firm NA is not aggressive and uses no debt. The two firms' operations are identical--they have the same total investor-supplied capital, sales, operating costs, and EBIT. Thus, they differ only in their use of financial leverage (wd). Both the firms have capital of 1,50,000/- and EBIT of 40,000/- and tax rate of 35%. Firm A has 50% debt in its capital structure and the rate of interest is 12%, whereas firm B has no debt.

   a. Based on the above data, how much higher or lower is firm A's ROE (Return on equity) than that of firm NA? b. Also compute WACC of both firms if the risk free rate is 7%, average market return is 14% and beta of firm A is 0.9 and beta of firm NA is 1.3.