You are considering a stock investment in one of two firms (AllDebt, Inc., and A

Question

You are considering a stock investment in one of two firms (AllDebt, Inc., and AllEquity, Inc.), both of which operate in the same industry and have identical operating income of $10.00 million. AllDebt, Inc., finances its $25 million in assets with $24 million in debt (on which it pays 10 percent interest annually) and $1 million in equity. AllEquity, Inc., finances its $25 million in assets with no debt and $25 million in equity. Both firms pay a tax rate of 30 percent on their taxable income. Calculate the income available to pay the asset funders (the debt holders and stockholders) and resulting return on asset-funders' investment for the two firms. (Enter your dollar answers in millions of dollars. Round all answers to 2 decimal places.)

Explanation / Answer

llDebt, Inc.

AllEquity, Inc.

Particulars Amount ($) Ratio Income (Million Dollor) Debt 24 24/25 10(1-0.3) * 24/25 = 6.72 Equity 1 1/25 10(1-0.3) * 1/25 = 0.28 Total25 7

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.