Question: Calculate the basic earning power (BEP) and return on equity (ROE) for a firm with 100% equity, and BEP and ROE for a firm with

Calculate the basic earning power (BEP) and return on equity (ROE) for a firm with 100% equity, and BEP and ROE for a firm with 50% equity and 50% debt according to the following data. Also, what are the expected ROE's and standard deviation of ROE's for both unlevered and levered firms? Two firms are identical except for the capital structure. Assets $50,000 EBIT $3,000 in recession (30% chance of occurring) $5,000 in normal case (40%) and $8,000 in boom (30%) Interest rate 8%, Tax 40%

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