Question

Check my work mode: This shows what is correct or incorrect for the work you have completed so far.it Problem 2-20 Debt versus Equity Financing (LG2-1) You are considering a stock investment in one of two firms (NoEquity, Inc. and NoDebt, Inc.), both of which operate in the same Industry and have identical operating Income of $7.0 million. NoEquity, Inc. finances its $20 million in assets with $19 million in debt (on which it pays 10 percent interest annually) and $1 million in equity. NoDebt, Inc, finances its $20 million in assets with no debt and $20 million in equity. Both firms pay a tax rate of 30 percent on their taxable income. Calculate the net income and return on assets for the two firms. (Enter your dollar answers in millions of dollars. Round all answers to 2 decimal places.) Answer is complete but not entirely correct. AllDebt AllEquity Income available for asset $ 3.57 Million $ 4.90 million funders Return on asset-funders' 17.85 % 24.50 % investment

Answer 1

Even though in the descriptive question given explains about two companies NoDebt Inc. and NoEquity Inc. The table provided below questions about All Debt and All Equity firms. NoEquity Inc is not an All Debt institution. So I have worked out the answers for a hypothetical All debt business.

Company NoEquity Inc. NoDebt Inc. All Debt Equity $1,000,000 $20,000,000 Debt $19,000,000 SO $o $20,000,000 Net Income Return on asset- funders investment = Average Total Assets

NoDebt Inc. 7.00 NoEquity Inc. 7.00 All Debt $ 7.00 1.90 $ 2.00 Particulars Operating Income Less: Interest expense (10% x Debt) Income before Tax (A-B) Tax expense (30% xC) Net Income (D-C) Average Total Assets Return on asset-funders investment (E = G) 7.00 $ 5.10 $ 1.53 $ $ 5.00 1.50 2.10 4.90 20.00 24.50% $ $ 3.575 20.00 $ 17.85% 3.50 20.00 17.50%