You are considering a stock investment in one of two firms (AllDebt, Incorporated, and AllEquity, Incorporated), both of which operate in the same industry and have identical EBITDA of $15.6 million and operating income of $8.0 million. AllDebt, Incorporated, finances its $60 million in assets with $59 million in debt (on which it pays 10 percent interest annually) and $1 million in equity. AllEquity, Incorporated, finances its $60 million in assets with no debt and $60 million in equity. Both firms pay a tax rate of 21 percent on their taxable income. Calculate the income available to pay the asset funders (the debt holders and stockholders) and resulting return on asset-funders' investment for the two firms. Note: Enter your dollar answers in millions of dollars. Round all answers to 3 decimal places. Income available for asset funders Return on asset-funders' investment AllDebt million % $ AllEquity 6.320 million 10.533 %

You are considering a stock investment in one of two firms (AllDebt, Incorporated, and AllEquity, Incorporated), both of which operate in the same industry and have identical EBITDA of $15.6 million and operating income of $8.0 million. AllDebt, Incorporated, finances its $60 million in assets with $59 million in debt (on which it pays 10 percent interest annually) and $1 million in equity. AllEquity, Incorporated, finances its $60 million in assets with no debt and $60 million in equity. Both firms pay a tax rate of 21 percent on their taxable income. Calculate the income available to pay the asset funders (the debt holders and stockholders) and resulting return on asset-funders' investment for the two firms. Note: Enter your dollar answers in millions of dollars. Round all answers to 3 decimal places. Income available for asset funders Return on asset-funders' investment AllDebt million % $ AllEquity 6.320 million 10.533 %

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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You are working in the Finance Department of Ranch Manufacturing, and your supervisor has asked you to compute the appropriate discount rate to use when evaluating the purchase of new packaging equipment for the plant. Under the assumption that the firm’s present capital structure reflects the appropriate mix of capital sources for the firm, you have determined the market value of the firm’s capital structure as follows: Bonds $4,000,000 Preferred stocks $2,000,000 Common Stock $6,000,000 To finance the purchase, Ranch Manufacturing will sell 10-year bonds paying interest at a rate of 7 percent per year (with interest paid semi-annually) at the market price of $1,050. Preferred stock paying a $2.00 dividend can be sold for $25. Common stock for Ranch Manufacturing is currently selling for $55 per share, and the firm paid a $3 dividend last year. Dividends are expected to continue growing at a rate of 5 percent per year for the indefinite future. If the firm’s tax rate is 30…
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