Problem 2-19 Debt versus Equity Financing (LG2-1)
You are considering a stock investment in one of two firms (NoEquity, Incorporated, and NoDebt, Incorporated), both of which operate in the same industry and have identical EBITDA of $39.0 million and operating income of $19.5 million. NoEquity, Incorporated, finances its $60 million in assets with $59 million in debt (on which it pays 10 percent interest annually) and $1 million in equity. NoDebt, Incorporated, finances its $60 million in assets with no debt and $60 million in equity. Both firms pay a tax rate of 21 percent on their taxable income.
Calculate the net income and return on assets—funders’ investments—for the two firms.
Note: Enter your dollar answers in millions of dollars. Round "Net income" answers to 3 decimal places and "Return on assets" answers to 2 decimal places.
