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5 Determine the ROE for firms A and B tabulated below, using a tax rate of...

5 Determine the ROE for firms A and B tabulated below, using a tax rate of 40% and an Annual market interest rate of 10% Based on the above information, calculate

A B
EBIT 100 100
EQUITY 2000 2500
Debt Outstanding 500 0

a) ROE for Firms A and B;

(b) ROE for each firm if the EBIT for each is $500; and

(c) Compare the ROE for the two firms for two levels of operating activity.

What is your conclusion regarding the effect of debt on ROE?

6(a) Explain the advantages of using market capitalization as a measure of equity, and then, its drawbacks.

(b)Explain how looking at the ratio of total assets to total liabilities can mislead the analyst.

7.Describe how the careful study of financial statements can help raise warning flags regarding risk in merger and acquisitions have driven stock for stock transactions, and explain some examples of the need to watch for earnings discontinuities.

8 (a)Explain some of the ways that companies downplay expenses?

(b) What do most analysts do to benefit from the insights provided by the careful scrutiny of financial statements?

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Expert Solution

ekkarill92 answered 1 year ago
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