Firm 1 has a capital structure with 20% debt and 80% equity. Firm 2s capital structure consists
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Firm 1 has a capital structure with 20% debt and 80% equity. Firm 2’s capital structure consists of 50% debt and 50% equity. Both firms pay 7% annual interest on their debt. Finally, suppose that both firms have invested in assets worth $100 million. Calculate the return on equity (ROE) for each firm, assuming the following:
a. The return on assets is 3%.
b. The return on assets is 7%.
c. The return on assets is 11%.
What general pattern do you observe?
Capital StructureCapital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a...
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Related Book For
Introduction to Corporate Finance What Companies Do
ISBN: 978-1111222284
3rd edition
Authors: John Graham, Scott Smart
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