Which firm's shareholders are wealthier? Explain why. The following are selected financial information on Firm A and Firm B. You are asked to complete the table by methodically calculating the missing information.
You will assume that Cost of Goods Sold (COGS) is 65% of Sales and that the company uses a marginal tax rate of 35%.
Firm A Firm B
Revenue $ 3,000 $ 3,000
COGS (Blank) (Blank)
Gross Profit 1,050 1,050
Operating Expenses (300) (300)
EBIT 750 750
Interest Expense (Blank) (Blank)
EBT (Blank) (Blank)
Income Tax @35% (Blank) (Blank)
Net Income $488 $472
Earnings per share (Blank) (Blank)
Dividends per share (Blank) (Blank)
Expected Return on Equity (Blank) (Blank)
Estimated Share Price (Blank) (Blank)
Market Value of Equity (Blank) (Blank)
Market Value of Debt (Blank) (Blank)
Enterprise Value $2,181 $2,503
Outstanding Debt $ - $300
Shares Outstanding 600 300
Cost of Debt 6% 8%
Beta 1.40 1.70
Expected return on Market 9% 9%
Dividend pay-out ratio 50% 60%
Dividend growth 2% 2%
Risk free 3% 3%
Common equity $600 $300
Company’s debt trading @ n/a 105
Which firm's shareholders are wealthier? Explain why.