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 Outcome 2 Outcome 3 EBIT=200 EBIT=100 EBIT=40 What is the ROE for Firm U and L, respectively? Which firm’s ROE is more volatile? (SHOW YOUR WORK)
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 Outcome 2 Outcome 3 EBIT=200 EBIT=100 EBIT=40 What is the ROE for Firm U and L, respectively? Which firm’s ROE is more volatile? (SHOW YOUR WORK)
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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- 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 |
Outcome 2 |
Outcome 3 |
|
EBIT=200 |
EBIT=100 |
EBIT=40 |
What is the ROE for Firm U and L, respectively? Which firm’s ROE is more volatile? (SHOW YOUR WORK)
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