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Adams operates his $35000 firm using his own equity. Bob operates his firm with $17500 of...

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Finance

Adams operates his $35000 firm using his ownequity. Bob operates his firm with $17500 of hisown money plus $17500 of debt at a cost of10 percent interest.
Calculate Adams's and Bob's return on equity if their respectivebusinesses produce earnings before interest and tax of$7000. Assume perfect markets.
Adams's return on equity: %
Bob's return on equity: %

Answer & Explanation Solved by verified expert
4.0 Ratings (591 Votes)

Adam's EBIT=   7000  
Tax is not given. Equity amount is $35000. debt is no there. so EBIT will be net income.      
ROE = 7000/35000*100=      
20 %
            
Bob's EBIT=   7000  
Equity =    17500  
Interest on debt of $17500= 17500*10/100=   1750  
Net income = EBIt - interest      
      
7000-1750=   5250  
ROE= 5250/17500*100=      
30      
So, Adam   ROE = 20%  
Bob's ROE   30%  
      
      
      
      
      
      
      
      
      
      
      
      
      
      
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Transcribed Image Text

Adams operates his $35000 firm using his ownequity. Bob operates his firm with $17500 of hisown money plus $17500 of debt at a cost of10 percent interest.Calculate Adams's and Bob's return on equity if their respectivebusinesses produce earnings before interest and tax of$7000. Assume perfect markets.Adams's return on equity: %Bob's return on equity: %

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