Question: Explain how to solve for the return on equity for both firms.Assume a 40% tax rate and a 15% interest rate. Firm U (unleveraged) Firm

Explain how to solve for the return on equity for both firms.Assume a 40% tax rate and a 15% interest rate.

Firm U (unleveraged) Firm L (Leveraged) CA 50 Debt 0 CA 50 Debt 50 FA 50 Equity 100 FA 50 Equity 50 TA 100 100 TA 100 100 Expected Bad Expected Bad Sales 100 82.5 Sales 100 82.5 Oper Costs 70 80 Oper Costs 70 80 EBIT 30 2.5 EBIT 30 2.5 Interest 0 0 Interest 7.5 7.5 EBT 30 2.5 EBT 22.5 -5 Taxes 12 1 Taxes 9 -2 Net Inc 18 1.5 Net Inc 13.5

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