Firm A is very aggressive in its use of debt to leverage up its earnings for...

 

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Firm A is very aggressive in its use of debt to leverage up its earnings for common stockholders, whereas Firm NA is not aggressive and uses no debt. The two firms' operations are identical--they have the same total investor-supplied capital, sales, operating costs, and EBIT. Thus, they differ only in their use of financial leverage (wa). Both companies are small, so they are not subject to the interest deduction limitation. Based on the following data, how much higher or lower is A's ROE than that of NA, i.e., what is ROEA-ROENA? Do not round your intermediate calculations. Applicable to Both Firms $155,000 $40,000 25% Capital EBIT Tax rate 10.25% O 12.01% O 10.35% 12.12% 12.84% Firm A's Data WA Int. rate 50% 12% Wa Int. rate Firm NA's Data 0% 10% Firm A is very aggressive in its use of debt to leverage up its earnings for common stockholders, whereas Firm NA is not aggressive and uses no debt. The two firms' operations are identical--they have the same total investor-supplied capital, sales, operating costs, and EBIT. Thus, they differ only in their use of financial leverage (wa). Both companies are small, so they are not subject to the interest deduction limitation. Based on the following data, how much higher or lower is A's ROE than that of NA, i.e., what is ROEA-ROENA? Do not round your intermediate calculations. Applicable to Both Firms $155,000 $40,000 25% Capital EBIT Tax rate 10.25% O 12.01% O 10.35% 12.12% 12.84% Firm A's Data WA Int. rate 50% 12% Wa Int. rate Firm NA's Data 0% 10%

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Answer Calculation Answer 1035 capital A PS P Rinancial Leverage B 50 21 Bqu... View the full answer