Question 33

There are two firms: Firm U and Firm L. Both firms have $100M total assets and $16M EBIT (earnings before interest and taxes). Firm U is an unleveraged firm without debt. Firm L is a leveraged firm with 50% of debt and 50% of common equity. The pre-tax cost of debt for Firm L is 8%. Both firms have 30% corporate tax rate. Calculate the return on equity (ROE) for firm U

a. 9.6%

b. 11.2%

c. 12.0%

d. 15.2%

Question 34

Based on the information from Question 33, whats the return on equity (ROE) for firm L

a. 9.6%

b. 13.2%

c. 16.8%

d. 19.2%

Question 35

Based on the information from Question 33, whats the difference of the total dollars paid to all investors in Firm L and Firm U

a. $1.0 million

b. $4.8 million

c. $5.8 million

d. $1.2 million