You are considering a stock investment in one of two firms (NoEquity, INc. and N
ID: 2812733 • Letter: Y
Question
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 $10.0 million. NoEquity, 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. NoDebt, Inc. 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.) AllDebt AllEquity Income available for asset funders Million % Million % Return on asset-funders’ investment
Explanation / Answer
No Equity:
net income = ( EBIT - interest)( 1 - tax)
net income = [( 10 - ( 0.1 * 24)]( 1 - 0.3)
net income = 5.32 million
No Debt:
Net income = EBIT ( 1 - tax)
Net income = 10 ( 1 - 0.3)
Net income = 7 million
Return on assets for no equity = ( net income / total assets) * 100
Return on assets for no equity = ( 5.32 / 25 ) * 100
Return on assets for no equity = 21.28%
Return on assets for no debt = ( net income / total assets) * 100
Return on assets for no debt = ( 7 / 25 ) * 100
Return on assets for no debt = 28%
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