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QUESTION 2 Net Income Debt Equity Dividends B D 110,000 115,000 215,000 203,000 525,000 530,000 630,000 612,000 2,700,000 2,700,000 3,000,000 3,000,000 50,000 52,000 106,000 97,000

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QUESTION 2 Net Income Debt Equity Dividends B D 110,000 115,000 215,000 203,000 525,000 530,000 630,000 612,000 2,700,000 2,700,000 3,000,000 3,000,000 50,000 52,000 106,000 97,000 payout retention ROE 45% 54.5% 4.1% 45% 54.8% 4.3% 49% 50.7% 7.2% 48% 52.2% 6.8% 2.2% 6% 2.3% 7% 3.6% 10% 3.5% 10% Cost of Debt (Interest Rate on Debt) If the tax rate for each company is 30%, which company can use debt to increase ROE? B OC D

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