You have the following information about two firms, Debt Free, Incorporated and Debt Spree, Incorporated. Both...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
You have the following information about two firms, Debt Free, Incorporated and Debt Spree, Incorporated. Both firms have the same prospects for sales and EBIT, and both have the same level of assets, tax rate and borrowing rate. They differ in their use of debt inancing. Scenario Bad year Normal year Good year Total assets Tax rate Debt Equity Borrowing rate Interest expense for Debt Free Interest expense for Debt Spree Scenario Sales $ 200 $ 275 $ 380 Bad year Normal year Good year ROA Debt Free $ 250 21% se $ 250 Required: a. Calculate the Interest expense for each firm: EBIT $ 12 16% % % % $ 34 $ 51 b. Calculate the following items for each firm for each scenario (bad year, normal year, good year); return on assets (ROA), net profit, and return on equity (ROE). (Use a minus sign to Indicate negative answers. Round your answers to 2 decimal places.) Debt Spree $ 250 Debt Free Net Profit 21% $ 150 $ 100 16% ROE 96 96 % ROA % % % Debt Spree Net Profit ROE 96 96 % You have the following information about two firms, Debt Free, Incorporated and Debt Spree, Incorporated. Both firms have the same prospects for sales and EBIT, and both have the same level of assets, tax rate and borrowing rate. They differ in their use of debt inancing. Scenario Bad year Normal year Good year Total assets Tax rate Debt Equity Borrowing rate Interest expense for Debt Free Interest expense for Debt Spree Scenario Sales $ 200 $ 275 $ 380 Bad year Normal year Good year ROA Debt Free $ 250 21% se $ 250 Required: a. Calculate the Interest expense for each firm: EBIT $ 12 16% % % % $ 34 $ 51 b. Calculate the following items for each firm for each scenario (bad year, normal year, good year); return on assets (ROA), net profit, and return on equity (ROE). (Use a minus sign to Indicate negative answers. Round your answers to 2 decimal places.) Debt Spree $ 250 Debt Free Net Profit 21% $ 150 $ 100 16% ROE 96 96 % ROA % % % Debt Spree Net Profit ROE 96 96 %
Expert Answer:
Answer rating: 100% (QA)
To calculate the interest expense for each firm we need to multiply the debt amount by the borrowing rate Interest expense for Debt Free Interest expe... View the full answer
Related Book For
Financial management theory and practice
ISBN: 978-1439078099
13th edition
Authors: Eugene F. Brigham and Michael C. Ehrhardt
Posted Date:
Students also viewed these finance questions
-
You throw a ball for your dog to fetch. The ball leaves your hand with a speed of 2 m/s, at an angle of 30 to the horizontal, and from a height of 1.5 m above the ground. The mass of the ball is 0.5...
-
A thermal window consisting of two panes of 0.25" glass (R-value 0.08 hr. ft. F/BTU each), separated by a layer of air 0.75" thick is now used as a horizontal window in the ceiling (a skylight) of an...
-
In June 2020, William was in accident and was unable to work for six weeks. During this period, he received disability payments totalling $14,327 from Soo Disability Assurance Co. The $900 in...
-
An arm ABC lying in a horizontal plane and supported at A (see figure) is made of two identical solid steel bars AB and BC welded together at a right angle. Each bar is 20 in. long. Knowing that the...
-
Greety Food in Ashland, Kentucky, manufactures and markets snack foods. Sita Lee manages the company's fleet of 220 delivery trucks. Lee has been charged with *reengineering* the fleet-management...
-
A home builder must construct a sewage treatment plant and deposit sufficient money in a perpetual trust fund to pay the $5000 per year operating cost and to replace the treatment plant every 40...
-
The T-account for cash and the bank statement of Mee Auto Services for the month of March 2010 follows: Cash Mar 1 3,200 Check #704 540 Mar 10 deposit 750 Check #705 210 Mar 31 deposit 200 Check #706...
-
Roberta Santos, age 41, is single and lives at 120 Sanbome Avenue, Springfield, IL 60781. Her Social Security number is 123-45-6789. Roberta has been divorced from her former husband, Wayne, for...
-
The cost of upgrading to the mechanized palletizing process is $500,000. Its Maintenance costs are 500$ per year, for a life of the machine of 20 years. Minimum acceptable rate of return or MARR= 12%...
-
Mr. M has been employed as an engineer by A Ltd., a company incorporated in Hong Kong. During the year ended 31 March 2019, Mr. M had the following income and expenditure. A monthly salary of...
-
POORS Company has an overdue note payable to BDA Bank of P9,000,000 and recorded accrued interest of P810,000. On December 31, 2020, BDA Bank agreed to the following restructuring agreement: *Reduce...
-
What racial issues do you believe are facing sports today? Do you believe Title VII has resulted in progress regarding racial discrimination in sports? Title IX Mary Williams was an outstanding...
-
Problem 1: From what height can a 1 kg falling object cause fracture of the skull? Assume that the object is hard, that the area of contact with the skull is 1 cm, and that the duration of impact is...
-
PERSONAL FINANCE Money Management & Creating a Budget 1. How much income do you receive each month? a. includes job, allowance, gift $, etc. name: 2. Figure out your major expense/spending categories...
-
Suppose a person in New York (who has never been to Texas), purchases a custom motorcycle from a Texas company over the Internet. After receiving the motorcycle, the New York resident is in a wreck...
-
Legal sanctions are important in a property-based legal system because with no punishment people will not listen to the law and they will take other people's property. People need a remedy they can...
-
Wed $20,000 from his best friend Steve. Fred promised to pay Steve back in equal annual installments over the next three years, with an annual interest rate of 5%. Complete the amortization schedule...
-
When you weigh yourself on good old terra firma (solid ground), your weight is 142 lb. In an elevator your apparent weight is 121 lb. What are the direction and magnitude of the elevator's...
-
Distinguish among beta (or market) risk, within-firm (or corporate) risk, and standalone risk for a project being considered for inclusion in a firms capital budget.
-
Buena Terra Corporation is reviewing its capital budget for the upcoming year. It has paid a $3 dividend per share (DPS) for the past several years, and its shareholders expect the dividend to remain...
-
Are lessees more likely to be in higher or lower income tax brackets than lessors?
-
What knowledge of the EDP system should the auditor acquire in obtaining an understanding?
-
a. Under what circumstances can tests of controls be performed without the use of the computer? b. What are the advantages and disadvantages of auditing around the computer?
-
a. Under what circumstances may it be advantageous to test controls with the computer? b. What are the disadvantages of auditing through the computer?
Study smarter with the SolutionInn App