Financial Ratios
A Ratio refers to a figure calculated as a reference to the relationship of two or more numbers and can be expressed as a fraction, proportion, percentage, or the number of times. When the number is determined by taking two accounting numbers derived from the financial statements, it is termed as the accounting ratio.
Return on Equity
The Return on Equity (RoE) is a measure of the profitability of a business concerning the funds by its stockholders/shareholders. ROE is a metric used generally to determine how well the company utilizes its funds provided by the equity shareholders.
a) Consider two firms L (Levered) & U (Unlevered) which are identical in all respect except for the capital structure. Both firms have EBIT of sh.900,000 ,a
Required:
i) Using the Net income approach, compute the values of the two firms and WACC
ii) Determine whether any of the two firms is overvalued giving an opportunity to make arbitrage profit
iii) When would the arbitrage process cease?
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