Adams operates his $35000 firm using his own equity. Bob operates his firm with $17500 of...

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Adams operates his $35000 firm using his ownequity. Bob operates his firm with $17500 of hisown money plus $17500 of debt at a cost of10 percent interest.
Calculate Adams's and Bob's return on equity if their respectivebusinesses produce earnings before interest and tax of$7000. Assume perfect markets.
Adams's return on equity: %
Bob's return on equity: %

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4.0 Ratings (591 Votes)

Adam's EBIT=   7000
Tax is not given. Equity amount is $35000. debt is no there. so EBIT will be net income.
ROE = 7000/35000*100=
20 %

Bob's EBIT=   7000
Equity =    17500
Interest on debt of $17500= 17500*10/100=   1750
Net income = EBIt - interest

7000-1750=   5250
ROE= 5250/17500*100=
30
So, Adam   ROE = 20%
Bob's ROE   30%

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Transcribed Image Text

Adams operates his $35000 firm using his ownequity. Bob operates his firm with $17500 of hisown money plus $17500 of debt at a cost of10 percent interest.Calculate Adams's and Bob's return on equity if their respectivebusinesses produce earnings before interest and tax of$7000. Assume perfect markets.Adams's return on equity: %Bob's return on equity: %