Calculate the return on equity for each firm

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Reference no: EM131328422

Firm 1 has a capital structure with 20 percent debt and 80 percent equity. Firm 2's capital structure consists of 50 percent debt and 50 percent equity. Both firms pay 7 percent annual interest on their debt.

Finally, suppose both firms have invested in assets worth $100 million. Calculate the return on equity (ROE) for each firm, assuming the following:

a. The return on assets is 3 percent.

b. The return on assets is 7 percent.

c. The return on assets is 11 percent. What general pattern do you observe?

Reference no: EM131328422

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