Answer:
2.41%
Explanation:
The difference between the two firms' ROEs is shown below:-
Particulars Firm HD Firm LD
Assets $200 Debt ratio 50% Debt ratio 30%
EBIT $40 Interest rate 12% Interest rate 10%
Tax rate 35%
Debt $100 $60
Interest $12 $6
($100 × 12%) ($60 × 10%)
Taxable income $28 $36
($40- $12) ($40 - $6)
Net income $18.2 $22.1
$28 × (1 - 0.35) $36 × (1 - 0.35)
Equity $100 $140
($200 - $100) ($200 - $60)
ROE 18.2% 15.79%
($18.2 ÷ $100) ($22.1 ÷ $140)
Taxable income = EBIT - Interest
Net income = Income - Taxable income
Equity = Assets - Debt
ROE = Net income ÷ Equity
Difference in ROE = ROE Firm HD - ROE Firm LD
= 18.2% - 15.79%
= 2.41%
So, for computing the difference between the two firms' ROEs we simply deduct the ROE firm LD from ROE firm HD.
Answer:
the weightage average cost of capital of the firm is 13.50%
Explanation:
The computation of the weighted average cost of capital is shown below;
WACC = Cost of debt × weightage of debt + cost of equity × weightage of equity
= 10% × ($600,000 ÷ $2,000,000) + 15% × ($1,400,000 ÷ $2,000,00)
= 3% + 10.5%
= 13.5%
hence, the weightage average cost of capital of the firm is 13.50%
Answer:
$122,800
Explanation:
For computing the after-tax cash flow, first we have to determine the loss on sale a fixed asset which is shown below:
Loss on sale of the fixed asset would be
= Selling Price - Book Value
= $115,000 - $135,000
= -$20,000
And the tax rate is 39%
So the tax credit would be
= $20,000 × 39%
= $7,800
Now the after-tax cash flow of this sale would be
= Sale price + tax credit
= $115,000 + $7,800
= $122,800
