Question 36 There are two firms: Firm U and Firm L. Both firms have $50M total assets...

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Finance

Question 36
There are two firms: Firm U and Firm L. Both firms have $50Mtotal assets and $8M EBIT (earnings before interest and taxes).Firm U is an unleveraged firm without debt. Firm L is a leveragedfirm with 50% of debt and 50% of common equity. The pre-tax cost ofdebt for Firm L is 10%. Both firms have 40% corporate tax rate.Calculate the return on equity (ROE) for firm U.
9.6%
13.2%
16.0%
19.2%
Question 37
Based on the information from Question 36, what’s the return onequity (ROE) for firm L
9.6%
13.2%
16.0%
19.2%
Question 38
Based on the information from Question 36, what’s the differenceof the total dollars paid to all investors in Firm L and FirmU?
$3.2 million
$4.8 million
$5.8 million
$1.0 million

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Q 36 Return on equity ROE for firm U Net income Equity Here a Net income EBIT 1 Tax rate 40 or 040 Net income 8 Million 1 040 Net income 480 Million b Total assets Total liabilities Equity As it is unlevered firm so there is no debt or liabilities Total assets Equity 50 Million Now put the values into formula ROE for firm U 480 million 50 See Answer

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Question 36There are two firms: Firm U and Firm L. Both firms have $50Mtotal assets and $8M EBIT (earnings before interest and taxes).Firm U is an unleveraged firm without debt. Firm L is a leveragedfirm with 50% of debt and 50% of common equity. The pre-tax cost ofdebt for Firm L is 10%. Both firms have 40% corporate tax rate.Calculate the return on equity (ROE) for firm U.9.6%13.2%16.0%19.2%Question 37Based on the information from Question 36, what’s the return onequity (ROE) for firm L9.6%13.2%16.0%19.2%Question 38Based on the information from Question 36, what’s the differenceof the total dollars paid to all investors in Firm L and FirmU?$3.2 million$4.8 million$5.8 million$1.0 million