SLUTS (Ou points) 15 (1) Questions on the DuPont Identity and Cost of Capital (15 points)...

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SLUTS (Ou points) 15 (1) Questions on the DuPont Identity and Cost of Capital (15 points) Assume that Company A and Company B have the same conditions except for the different debt ratios (total debts/total assets) and borrowing rates. Both companies have total assets of $20,000,000, earnings before interest and tax (EBIT) of $4,000,000 with a profit margin of 14%, and a marginal tax rate of 40%. Company A has a debt ratio of 50% and a borrowing interest rate of 12%; Company B has a debt ratio of 30% and a borrowing interest rate of 10%. Please answer the following questions based on the above information. 1. What is the return on equity (ROE) of Company A and Company B respectively? Which company outperforms the asset-use efficiency? Explain. 2. Suppose the required rate of return for shareholders of the two companies is the same level at 18%, which company produces the lower cost of capital? Why? 3. If Company B expects to increase its debt ratio to 60%, and its borrowing rate will also increase to 15%, what is the ROE of Company B after the increase in debt ratio? Please comment on the appropriateness of using ROE vs. ROA (return on asset) to measure a company's profitability. lal SLUTS (Ou points) 15 (1) Questions on the DuPont Identity and Cost of Capital (15 points) Assume that Company A and Company B have the same conditions except for the different debt ratios (total debts/total assets) and borrowing rates. Both companies have total assets of $20,000,000, earnings before interest and tax (EBIT) of $4,000,000 with a profit margin of 14%, and a marginal tax rate of 40%. Company A has a debt ratio of 50% and a borrowing interest rate of 12%; Company B has a debt ratio of 30% and a borrowing interest rate of 10%. Please answer the following questions based on the above information. 1. What is the return on equity (ROE) of Company A and Company B respectively? Which company outperforms the asset-use efficiency? Explain. 2. Suppose the required rate of return for shareholders of the two companies is the same level at 18%, which company produces the lower cost of capital? Why? 3. If Company B expects to increase its debt ratio to 60%, and its borrowing rate will also increase to 15%, what is the ROE of Company B after the increase in debt ratio? Please comment on the appropriateness of using ROE vs. ROA (return on asset) to measure a company's profitability. lal

Answer rating: 100% (QA)

The image presents a set of finance problems centered on calculating and analyzing Return on Equity ROE the cost of capital and the impact of changes in debt ratios and borrowing rates on these financ... View the full answer