The following are selected financial information on firm A and B. You are asked to by methodically calculating the missing information.

You will assume that Cost of Goods Sold (COGS) is 65% of Sales and that the company uses a marginal tax rate of 35%.

FIRM A FIRM B

Revenue $ 3,000 $ 3,000

COGS - -

Gross Profit 1,050 1,050

Operating Expenses (300) (300)

EBIT 750 750

Interest Expense - -

Earnings before Tax(EBT) - -

Income Tax @35% - -

Net Income $ 488 $ 472

Earnings per share - -

Dividend per share - -

Expected Return on Equity - -

Estimated Share Price - -

Market value of Equity - -

Market value of Debt - -

Enterprise Value $ 2,181 $ 2,503

Outstanding Debt $ - $ 300

Shares Outstanding 600 300

Cost of Debt 6% 8%

Beta 1.40 1.70

Expected return on Market 9% 9%

Dividend pay-out ratio 50% 60%

Dividend Growth 2% 2%

Risk Free 3% 3%

Common Equity $ 600 $ 300

Company's debt trading @ n/a 105

Which Firm's Shareholders are wealthier? Explain why!