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  3. 31.) there are two firms: firm u and firm l. both

31.) There are two firms: Firm U and Firm L. Both firms have $100M total...

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Finance

31.)

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% of common equity. The pre-tax cost of debt for Firm L is 10%. Both firms have 30% corporate tax rate. Calculate the return on equity (ROE) for firm U

10.0%

11.5%

14.0%

16.2%

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