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