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Note: Total equity = Contributed capital + earned capital Question 113. (12 marks) The LEO company has an ROA of 10%. The company has a
Note: Total equity = Contributed capital + earned capital Question 113. (12 marks) The LEO company has an ROA of 10%. The company has a simple balance sheet: TA=TD+TE; Its total assets, TA=$240,000; its tax rate is 20% and its debt-to-equity ratio is [TD/TE] =1/2. The cost of borrowing, before tax, isr=8%. NIR = rf1-tax rate) is the net interest rate [= 8%(1-2) = 6.4%). Spread=ROA - NIR. Required: Calculate (a) ROE using the formula ROE EROA + Spread"[TD/TE), (b) the underlying B/S, and 1/5; (c) ROA as the weighted average of NIR and ROE. The marks are: (a) 2 marks, (b) 7 marks, and (c) 3 marks
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