Two companies have $1M in assets and the same basic earning power ratio of 25 percent. Neither company owns securities, so each company’s income will be comprised solely of operating income. They only difference between the two companies is the fact that Company A’s assets are 100 percent equity financed whereas Company B’s assets are 45 percent debt financed with that debt carrying an 8 percent interest rate. If both companies have a 40 percent tax rate, fine each company’s ROE and ROA.
Two companies have $1M in assets and the same basic earning power ratio of 25 percent. Neither company owns securities, so each company’s income will be comprised solely of operating income. They only difference between the two companies is the fact that Company A’s assets are 100 percent equity financed whereas Company B’s assets are 45 percent debt financed with that debt carrying an 8 percent interest rate. If both companies have a 40 percent tax rate, fine each company’s ROE and ROA.
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 companies have $1M in assets and the same basic earning power ratio of 25 percent. Neither company owns securities, so each company’s income will be comprised solely of operating income. They only difference between the two companies is the fact that Company A’s assets are 100 percent equity financed whereas Company B’s assets are 45 percent debt financed with that debt carrying an 8 percent interest rate. If both companies have a 40 percent tax rate, fine each company’s ROE and ROA.
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