Question
Problem 2-19 Debt versus Equity Financing (LG2-1) You are considering a stock investment in one of two firms (NoEquity, Inc., and NoDebt, Inc.), both of
Problem 2-19 Debt versus Equity Financing (LG2-1)
You are considering a stock investment in one of two firms (NoEquity, Inc., and NoDebt, Inc.), both of which operate in the same industry and have identical operating income of $18.5 million. NoEquity, Inc., finances its $50 million in assets with $49 million in debt (on which it pays 10 percent interest annually) and $1 million in equity. NoDebt, Inc., finances its $50 million in assets with no debt and $50 million in equity. Both firms pay a tax rate of 30 percent on their taxable income. |
Calculate the net income and return on assets for the two firms. (Enter your dollar answers in millions of dollars. Round all answers to 2 decimal places.) |
NoEquity | NoDebt | |
Net income | $ m | $ m |
Return on assets | % | % |
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