irm AB and Firm YZ are identical except for their debt-to-total-assets ratios (D/Tas) and interest rates on debt. Each has $200,000 in assets, $40,000 EBIT, and a 40% marginal tax rate. Firm AB has a D/TA ratio of 40% and pays 7.5% interest on its debt, whereas YZ has a 60% D/TA ratio and pays 10% interest on debt. Each firm has 5,000 shares of common stock outstanding. Calculate each firm's EPS and Return on Equity.

irm AB and Firm YZ are identical except for their debt-to-total-assets ratios (D/Tas) and interest rates on debt. Each has $200,000 in assets, $40,000 EBIT, and a 40% marginal tax rate. Firm AB has a D/TA ratio of 40% and pays 7.5% interest on its debt, whereas YZ has a 60% D/TA ratio and pays 10% interest on debt. Each firm has 5,000 shares of common stock outstanding. Calculate each firm's EPS and Return on Equity.

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter12: Capital Structure

Section: Chapter Questions

Problem 3PROB

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