Firm A Firm B Revenue $ 3,000 $ 3,000 COGS (Blank) (Blank) Gross Profit 1,050 1,

ID: 2653083 • Letter: F

Question

Firm A Firm B

Revenue $ 3,000 $ 3,000

COGS (Blank) (Blank)

Gross Profit 1,050 1,050

Operating Expenses (300) (300)

EBIT 750 750

Interest Expense (Blank) (Blank)

EBT (Blank) (Blank)

Income Tax @35% (Blank) (Blank)

Net Income $488 $472

Earnings per share (Blank) (Blank)

Dividends per share (Blank) (Blank)

Expected Return on Equity (Blank) (Blank)

Estimated Share Price (Blank) (Blank)

Market Value of Equity (Blank) (Blank)

Market Value of Debt (Blank) (Blank)

Enterprise Value $2,181 $2,503

Outstanding Debt $ - $300

Shares Outstanding 600 300

Cost of Debt 6% 8%

Beta 1.40 1.70

Expected return on Market 9% 9%

Dividend pay-out ratio 50% 60%

Dividend growth 2% 2%

Risk free 3% 3%

Common equity $600 $300

Company’s debt trading @ n/a 105

Which firm's shareholders are wealthier? Explain why.

For Firm A, Earning per share = Profit after tax (Net income) / No of outstanding shares

For Firm A, Earning per share = 488/600 = $.8133

For Firm B, Earning per share = Profit after tax (Net income) / No of outstanding shares

For Firm B, Earning per share = 472/300 = $1.5733

Since, earning per share is more in case of firm B than Firm A so shareholders of Firm B are more wealthier.

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