Debt versus Equity Financing (LG2-1)
You are considering a stock investment in one of two firms (AllDebt, Inc., and AllEquity, Inc.), both of which operate in the same industry and have identical operating income of $7.00 million. AllDebt, Inc., finances its $35 million in assets with $34 million in debt (on which it pays 10 percent interest annually) and $1 million in equity. AllEquity, Inc., finances its $35 million in assets with no debt and $35 million in equity. Both firms pay a tax rate of 30 percent on their taxable income.
Calculate the income available to pay the asset funders (the debt holders and stockholders) and resulting return on asset-funders' investment for the two firms. (Enter your dollar answers in millions of dollars. Round all answers to 2 decimal places.)
All Debt All Equity
Income available for asset funders $ m $ m
Return on asset-funders' investment % %