Question

Two companies have $1M in assets and the same basic earning power ratio of 25 percent. Neither company owns securities, so each company’s income will be comprised solely of operating income. The only difference between the two companies is the fact that Company A’s assets are 100 percent equity financed whereas Company B’s assets are 45 percent debt financed with that debt carrying an 8 percent interest rate. If both companies have a 40 percent tax rate, find each company’s ROE and ROA.

Answer 1

I HAVE TAKE COMPANY A = 100% EQUITY FINANCED, COMPANY B = LEVERED = 45% DEBT, 55% EQUITY