Question
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).
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
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