Question 6 0/1 pts ns Haley and Laura are identical except for their financial l

Question

Question 6 0/1 pts ns Haley and Laura are identical except for their financial leverage ratios and interest rates they pay on debt. Each has $10 million in invested capital has 4 million in EBIT, and is in the 50% federal-plus-st tax bracket. Haley, however, has a debt to capital ratio o 6 % and pays 1 % nterest on its debt, whereas Laura has a 4 % debt to capita a and pays % on its debt. Neither mus spre red stock its capital structure. What is the ROE for each firm? The ROE is 40% for each firm The ROE is 20% for each firm The ROE for Haley is 42.5% and the ROE for Laura is 31.7% The ROE for Haley is 24.5% and the ROE for Laura is 26,7%

Explanation / Answer

Net income = EBIT - interest - tax

Haley,

Interest expense = 10% * 60% * 10

Interest expense = 10% * 6 = $0.6 million

Profit before tax = 4 - 0.6 = $3.4 millions

Net income = 3.4 * (1-0.50) = $1.7 millions

Laura,

Interest expense = 5% * 40% * 10

Interest expense = 5% * 4 = $0.2 million

Profit before tax = 4 - 0.2 = $3.8 millions

Net income = 3.8 * (1-0.50) = $1.9 millions

Haley, ROE = 1.7/4 = 42.5%

Laura, ROE = 1.9/6 = 31.7%

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

---

---

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