There are two firms: Firm U and Firm L. Both firms have $100M total assets and $15M EBIT (eamings before interest and taxes). Firm U is an unleveraged firm without debt. Firm L is a leveraged firm with 50% of debt and 50% of common equity. The pre-tax cost of debt for Firm L is 8%. Both firms have 25% corporate tax rate. Calculate the return on equity (ROE) for firm U. O 9.60% 11.25 % O 16.50% O 18.20 % QUESTION 40 Based on the information from Question 39, what's the return on equity (ROE) for firm L O 9.60% O 11.25% 16.50% O 18.20 % QUESTION 41
There are two firms: Firm U and Firm L. Both firms have $100M total assets and $15M EBIT (eamings before interest and taxes). Firm U is an unleveraged firm without debt. Firm L is a leveraged firm with 50% of debt and 50% of common equity. The pre-tax cost of debt for Firm L is 8%. Both firms have 25% corporate tax rate. Calculate the return on equity (ROE) for firm U. O 9.60% 11.25 % O 16.50% O 18.20 % QUESTION 40 Based on the information from Question 39, what's the return on equity (ROE) for firm L O 9.60% O 11.25% 16.50% O 18.20 % QUESTION 41
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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QUESTION 41
Transcribed Image Text:QUESTION 39
There are two firms: Firm U and Firm L. Both firms have $100M total assets and $15M EBIT (earnings before interest and taxes). Firm U is an unleveraged firm without debt. Firm L is a leveraged firm with 50% of debt and 50% common equity. The pre-tax cost of
debt for Firm L is 8%. Both firms have 25% corporate tax rate. Calculate the return on equity (ROE) for firm U.
O 9.60%
Ⓒ 11.25%
O 16.50%
O 18.20%
QUESTION 40
Based on the information from Question 39, what's the return on equity (ROE) for firm L
O 9.60%
O 11.25%
Ⓒ 16.50%
O 18.20%
QUESTION 41
Based on the information from Question 39, what's the difference of the total dollars paid to all investors in Firm L and Firm U
O $3.2 million
O $4.8 million
O $5.8 million
O $1.0 million
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