G Final a mhe.tp?-0.1513643289915081 152 Final Exam Question 1fo 1 8.34 points P

Question

G Final a mhe.tp?-0.1513643289915081 152 Final Exam Question 1fo 1 8.34 points Problem 2-20 Debt versus Equity Financing (LG2- You are considering a stock investment in one of two fims (ADebt, Inc, and AlEquity, Inc.), both of which operabe in the same induntry and have identical operaling income of $11.00 milion ADebt, Inc. fnances ns $35 ,???0n i, assets weh $34 "don in debt (on wtich it pays 10 percent interest annualy) and St milion h equty AEquihy Inc. fnances Rs $35 million in assets with no debt and $35 milion in equity Both firms pay a ax ate of 30 pencent on their taxable Income Calclate the income available to pay the asset funders (the debt holders and stockholders) and resulting Round all answers to 2 decimal places) nvestment for the too ms (Enter your dollar answers in millions of dollars ncome available for asset lunders Retum on asset-funders investment Hints References Book & Resources o, "???

Explanation / Answer

Debt Inc Equity Inc EBIT 11.00 11.00 Interest = 34*10% = 3.40 0.00 EBT 7.60 11.00 Tax at 30% 2.28 3.30 Net income 5.32 7.70 Income available for asset funders = Interest expense+Net income = 8.72 7.70 Return on asset funders' investment (of $35 million) 24.91% 22.00%

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