Solution-Use of financial leverage

Use of financial leverage

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Firm A is very aggressive in its use of debt to leverage up its earnings for common stockholders, whereas Firm NA is not aggressive and uses no debt. The two firms' operations are identical ?they have the same total investor-supplied capital, sales, operating costs, and EBIT. Thus, they differ only in their use of financial leverage (w _d). Based on the following data, how much higher or lower is A's ROE than that of NA, i.e., what is ROE _A - ROE _NA?

Applicable to Both Firms		Firm A's Data		Firm NA's Data
Capital	$150,000	w_d	50%	w_d	0%
EBIT	$40,000	Int. rate	12%	Int. rate	10%
Tax rate	35%

Reference no: EM133112685

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Use of financial leverage

Reference no: EM133112685

Reference no: EM133112685

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