Firm AB and Firm YZ are identical except for their debt-to-total-assets ratios (D/TAs) and interest rates...

Firm AB and Firm YZ are identical except for their debt-to-total-assets ratios (D/TAs) and interest rates on debt. Each has $200,000 in assets, $40,000 EBIT, and a 40 percent marginal tax rate. Firm AB has a D/TA ratio of 40 percent and pays 7.5 percent interest on its debt, whereas YZ has a 60 percent D/TA ratio and pays 10 percent interest on debt. Each firm has 5,000 shares of common stock outstanding. Calculate each firm’s EPS and ROE (ROE 5 Net income/Equity). Discuss your results. Assume both firms are financed only by debt and common equity. *SHOW ALL WORK*

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