Lets assume that each company has $100 million in assets.

Company NL finances these assets completely with equity.

Company L finances its assets with 25% debt and 75% equity,

while Company LL finances its assets with 75% debt and 25% equity.

Lets further assume that the companies have identical operating earnings, $10 million, and that any debt has an interest rate of 5%.

Calculate : - Debt-equity and Debt-to-assets

- Net income

- Interest on debt

- Return on equity

- Return on assets

** Assuming that all three companies pay taxes at a rate of 30% on taxable income

** Calculate :

Return on equity

Return on assets

Net income

Taxes at 30%

Taxable income

Interest on debt