Question
In: Finance
The firms AA and BB are identical except for their D/A ratios and interest rates on...
The firms AA and BB are identical except for their D/A ratios and interest rates on debt. Each has $50 million in assets, earned $4 million before interest and taxes and has a 40% federal-plus-state tax rate. Firm AA, however, has 1- E/A ratio of 50% and pays 12% interest on its debt, whereas BB has a Wd of 30% and pays only 10% interest on debt.
a. Calculate the rate of return on equity for both firms.
b. Observing that AA has a higher return on equity, BB’s treasurer decides to raise the 1-E/A ratio from 30 to 70%, which will increase BB’s interest rate on all debt to 15%. Calculate the new rate of return on equity for BB
Solutions
Expert Solution
The answer to part a and b is showed in following pictures:
jeff jeffy answered 2 years agoRelated Solutions
Firms HL and LL are identical except for their financial leverage ratios and the interest rates...
Firms HL and LL are identical except for their financial
leverage ratios and the interest rates they pay on debt. Each has
$24 million in invested capital, has $6 million of EBIT, and is in
the 40% federal-plus-state tax bracket. Firm HL, however, has a
debt-to-capital ratio of 60% and pays 11% interest on its debt,
whereas LL has a 20% debt-to-capital ratio and pays only 8%
interest on its debt. Neither firm uses preferred stock in its
capital structure....
Firms HL and LL are identical except for their financial leverage ratios and the interest rates...
Firms HL and LL are identical except for their financial
leverage ratios and the interest rates they pay on debt. Each has
$12 million in invested capital, has $1.8 million of EBIT, and is
in the 40% federal-plus-state tax bracket. Firm HL, however, has a
debt-to-capital ratio of 45% and pays 12% interest on its debt,
whereas LL has a 25% debt-to-capital ratio and pays only 8%
interest on its debt. Neither firm uses preferred stock in its
capital structure....
Firms HL and LL are identical except for their financial leverage ratios and the interest rates...
Firms HL and LL are identical except for their financial
leverage ratios and the interest rates they pay on debt. Each has
$23 million in invested capital, has $4.6 million of EBIT, and is
in the 40% federal-plus-state tax bracket. Firm HL, however, has a
debt-to-capital ratio of 55% and pays 13% interest on its debt,
whereas LL has a 35% debt-to-capital ratio and pays only 10%
interest on its debt. Neither firm uses preferred stock in its
capital structure....
Firms HL and LL are identical except for their financial leverage ratios and the interest rates...
Firms HL and LL are identical except for their financial
leverage ratios and the interest rates they pay on debt. Each has
$21 million in invested capital, has $4.2 million of EBIT, and is
in the 40% federal-plus-state tax bracket. Firm HL, however, has a
debt-to-capital ratio of 60% and pays 11% interest on its debt,
whereas LL has a 25% debt-to-capital ratio and pays only 9%
interest on its debt. Neither firm uses preferred stock in its
capital structure....
Firms HL and LL are identical except for their financial leverage ratios and the interest rates...
Firms HL and LL are identical except for their financial
leverage ratios and the interest rates they pay on debt. Each has
$26 million in invested capital, has $3.9 million of EBIT, and is
in the 40% federal-plus-state tax bracket. Firm HL, however, has a
debt-to-capital ratio of 55% and pays 11% interest on its debt,
whereas LL has a 25% debt-to-capital ratio and pays only 8%
interest on its debt. Neither firm uses preferred stock in its
capital structure....
Firms HL and LL are identical except for their financial leverage ratios and the interest rates...
Firms HL and LL are identical except for their financial
leverage ratios and the interest rates they pay on debt. Each has
$14 million in invested capital, has $2.1 million of EBIT, and is
in the 40% federal-plus-state tax bracket. Firm HL, however, has a
debt-to-capital ratio of 45% and pays 11% interest on its debt,
whereas LL has a 35% debt-to-capital ratio and pays only 10%
interest on its debt. Neither firm uses preferred stock in its
capital structure....
Firms HL and LL are identical except for their financial leverage ratios and the interest rates...
Firms HL and LL are identical except for their financial
leverage ratios and the interest rates they pay on debt. Each has
$20 million in invested capital, has $3 million of EBIT, and is in
the 25% federal-plus-state tax bracket. Firm HL, however, has a
debt-to-capital ratio of 60% and pays 12% interest on its debt,
whereas LL has a 30% debt-to-capital ratio and pays only 9%
interest on its debt. Neither firm uses preferred stock in its
capital structure....
Firms HL and LL are identical except for their financial leverage ratios and the interest rates...
Firms HL and LL are identical except for their financial
leverage ratios and the interest rates they pay on debt. Each has
$15 million in invested capital, has $3 million of EBIT, and is in
the 40% federal-plus-state tax bracket. Firm HL, however, has a
debt-to-capital ratio of 50% and pays 12% interest on its debt,
whereas LL has a 35% debt-to-capital ratio and pays only 10%
interest on its debt. Neither firm uses preferred stock in its
capital structure....
Firms HL and LL are identical except for their financial leverage ratios and the interest rates...
Firms HL and LL are identical except for their financial
leverage ratios and the interest rates they pay on debt. Each has
$19 million in invested capital, has $5.7 million of EBIT, and is
in the 40% federal-plus-state tax bracket. Firm HL, however, has a
debt-to-capital ratio of 60% and pays 12% interest on its debt,
whereas LL has a 30% debt-to-capital ratio and pays only 10%
interest on its debt. Neither firm uses preferred stock in its
capital structure....
Firms HL and LL are identical except for their financial leverage ratios and the interest rates...
Firms HL and LL are identical except for their financial
leverage ratios and the interest rates they pay on debt. Each has
$23 million in invested capital, has $4.6 million of EBIT, and is
in the 40% federal-plus-state tax bracket. Firm HL, however, has a
debt-to-capital ratio of 55% and pays 11% interest on its debt,
whereas LL has a 40% debt-to-capital ratio and pays only 10%
interest on its debt. Neither firm uses preferred stock in its
capital structure....
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