Consider the following operating information gathered from three firms that are identical except for their capital structures:

a. Compute the WACC for each firm.

b. Compute the EVA for each firm.

c. Based on the results of your computations in part (b), which firm would be considered the best investment? Why?

d. Assume the industry P/E ratio generally is 15. Using the industry norm, estimate the price for each stock.

e. What factors might cause you to adjust the P/E ratio value used in part (d) so that it is more appropriate?

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Firm A Firm B Firm C Total invested capital Debt/assets ratio Shares outstanding Before-tax cost of debt Cost of equity Operating income, EBIT Net income Marginal tax rate $100,000 0.80 6,100 14% 26 % $100,000 $100,000 0.20 10,000 10% 20% S 25,00025,000 25,000 970 12,35014,950 0.35 0.50 8,300 12% 22% 0.35 0.35