Please show calculations. Thanks!

Question 1

Consider two hypothetical firms:Firm U, which uses no debt financing, and Firm L, which uses $1,000,000 of 5 percent debt.Both firms have $2,500,000 in assets, a 21 percent tax rate, and an expected EBIT of $250,000.

a. Construct partial income statements, which start with EBIT, for the two firms.

b. Now calculate ROE for both firms.

c. What happens to ROE for Firm U and Firm L if EBIT falls to $110,000? What does this imply about the impact of leverage on risk and return?

Problem 2

Below is return data for Companies X and Y.

Year Return X Return Y

1 15% 30%

2 17% 12%

3 25% 0%

1. Compute the mean return for each stock.
2. Compute the variance and standard deviation for each stock.
3. Looking at the data, would there be any benefits to buying both stocks rather than just one?

Probelem 3

Below is return data for Companies X and Y.

Prob Return X Return Y

20% 15% 30%

50% 17% 12%

30% 25% 0%

1. Compute the mean return for each stock.
2. Compute the variance and standard deviation for each stock.
3. Looking at the data, would there be any benefits to buying both stocks rather than just one?