8. Award: 5 out of 10.00 points You are considering a stock investment in one of

Question

8. Award: 5 out of 10.00 points You are considering a stock investment in one of two firms (NoEquity, Inc. and NoDebt, Inc), both of which operate in the same industry and have identical operating income of $32.5 million. NoEquity, Inc, finances its $65 million in assets with $64 million in debt (on which it pays 10 percent interest annually) and $1 milion in equity NoDebt, Inc., finances its $65 million in assets with no debt and $65 million in equity. Both firms pay a tax rate of 30 percent on their taxable income. Calculate the net income and return on assets for the two firms. (Enter your dollar answers in millions of dollars. Round all answers to 2 decimal places.) No Equity Net income Return on assets S 21.65 m 33.30 % No Debt S 22.75m 35.00 0 % eBook&Resources; References Worksheet Diticulty 3 Intermediate

Explanation / Answer

No Equity

No Debt

Net income

18.27 Million

22.75 Million

Return on assets

28.11%

35.00%

Workings

No Equity

No Debt

Operating income

$32.50 Million

$32.50 Million

Less : Interest on Debt

6.40 Million

-

Income Before Tax

26.10 Million

$32.50 Million

Less : Tax at 30%

7.83 Million

9.75 Million

Net Income

18.27 Million

22.75 Million

Return on assets

No Equity = [ $18.27 Million / $65 Million ] x 100 = 28.11%

No Debt = [ $22.75 Million / $65 Million ] x 100 = 35%

No Equity

No Debt

Net income

18.27 Million

22.75 Million

Return on assets

28.11%

35.00%

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