::: vuaskari.com ::: (need to know the process of ROE)

Firms A and B are identical except their use of debt and the interest rates they pay. Firm A has more debt and thus must pay a higher interest rate. 

Requirement:

Based on the data given below, how much higher or lower will be the A's ROE that of B, i.e., what is ROE_A - ROE_B?

 

Applicable to Both Firms              Firm A's Data            Firm LD's Data         

Assets Rs. 3,000,000                        Debt ratio 70%                 Debt ratio 20%

EBIT    Rs.500, 000                           Int. rate 12%                 Int. rate 10%

Tax rate  35%

 

For company A  70% leverage so equity will be 30% of 3,000,000 = 900000

EBIT =                              500,000

Interest (12% of 500,000) =  (6000)

EBT                                  494,000        

Tax  (35% of EBT)          (148200)          <------     ??

Net income                        345,800                  ??

Expected ROE (=NI/Equity) 345,800/ (900000) = 38.42%

 confusion

 some values comz HOW ?? 

 

when we need to know ROE then whats it calculation process ..... u can define from any question i jst want to know the complete process

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