Firm l ia a leveraged firm with 50 of debt and 50 of common, Accounting Basics

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Firm l ia a leveraged firm with 50 of debt and 50 of common

There are two firms : firm U and firm L. both firms have $50M total assests and $8M EBIT (earnings before interest and taxes).. firm U is an unleveraged firm without debt. Firm L ia a leveraged firm with 50% of debt and 50% of common equity. the pre-tax cost of debt for firm L is 10%. Both firms have 40% corporate tax rate. Calculate the return on equity(ROE) for firm U.

A) 9.6%

B) 13.2%

C) 16.0%

D) 19.2%

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Accounting Basics: Firm l ia a leveraged firm with 50 of debt and 50 of common

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