Firm LM's debt-to-total-assets ratio (D/TA) is 25 percent, whereas Firm QR's D/TA ratio is 50 percent. LM has $800,000 in assets, $60,000 EBIT, and 15,000 shares of stock outstanding, and it pays 8 percent interest. QR has $400,000 in assets, $70,000 EBIT, and 25,000 shares of stock outstading, and it pays 10 percent interest. The marginal tax rate for both firms is 40 percent. Calculate each firm's EPS and ROE (ROE = Net income/Equity). Discuss your results.
Firm LM's debt-to-total-assets ratio (D/TA) is 25 percent, whereas Firm QR's D/TA ratio is 50 percent. LM has $800,000 in assets, $60,000 EBIT, and 15,000 shares of stock outstanding, and it pays 8 percent interest. QR has $400,000 in assets, $70,000 EBIT, and 25,000 shares of stock outstading, and it pays 10 percent interest. The marginal tax rate for both firms is 40 percent. Calculate each firm's EPS and ROE (ROE = Net income/Equity). Discuss your results.
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
Problem 1PS
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Firm LM's debt-to-total-assets ratio (D/TA) is 25 percent, whereas Firm QR's D/TA ratio is 50 percent. LM has $800,000 in assets, $60,000 EBIT, and 15,000 shares of stock outstanding, and it pays 8 percent interest. QR has $400,000 in assets, $70,000 EBIT, and 25,000 shares of stock outstading, and it pays 10 percent interest. The marginal tax rate for both firms is 40 percent. Calculate each firm's EPS and ROE (ROE = Net income/Equity). Discuss your results.
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