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6. Two firms, U and L, have identical annual EBIT (no tax); Firm U has $1000 Equity and Firm L has $500 Equity and $500 Debt at 10% of interest. Assume 3 possible outcomes for U as below (the 3 outcomes occur with the same probability). Outcome 2 EBIT 100 What is the ROE for Firm U and L, respectively? Which firm's ROE is more volatile? Outcome 1 EBIT 200 Outcome 3 EBIT=40

6. Two firms, U and L, have identical annual EBIT (no tax); Firm U has $1000 Equity and Firm L has $500 Equity and $500 Debt at 10% of interest. Assume 3 possible outcomes for U as below (the 3 outcomes occur with the same probability). Outcome 2 EBIT 100 What is the ROE for Firm U and L, respectively? Which firm's ROE is more volatile? Outcome 1 EBIT 200 Outcome 3 EBIT=40

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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6. Two firms, U and L, have identical annual EBIT (no tax); Firm U has $1000 Equity and Firm L has $500 Equity and $500 Debt at 10% of interest. Assume 3 possible outcomes for U as below (the 3 outcomes occur with the same probability). Outcome 1 EBIT=200 Outcome 3 EBIT=40 Outcome 2 EBIT=100 What is the ROE for Firm U and L, respectively? Which firm's ROE is more volatile?
Transcribed Image Text:6. Two firms, U and L, have identical annual EBIT (no tax); Firm U has $1000 Equity and Firm L has $500 Equity and $500 Debt at 10% of interest. Assume 3 possible outcomes for U as below (the 3 outcomes occur with the same probability). Outcome 1 EBIT=200 Outcome 3 EBIT=40 Outcome 2 EBIT=100 What is the ROE for Firm U and L, respectively? Which firm's ROE is more volatile?
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