6. Two firms, U and L, have identical annual EBIT (no tax); Firm U has $1000 Equity and Firm L has $500 Equity and $500 Debt at 10% of interest. Assume 3 possible outcomes for U as below (the 3 outcomes occur with the same probability). Outcome 2 EBIT 100 What is the ROE for Firm U and L, respectively? Which firm's ROE is more volatile? Outcome 1 EBIT 200 Outcome 3 EBIT=40

6. Two firms, U and L, have identical annual EBIT (no tax); Firm U has $1000 Equity and Firm L has $500 Equity and $500 Debt at 10% of interest. Assume 3 possible outcomes for U as below (the 3 outcomes occur with the same probability). Outcome 2 EBIT 100 What is the ROE for Firm U and L, respectively? Which firm's ROE is more volatile? Outcome 1 EBIT 200 Outcome 3 EBIT=40

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Suppose that JB Cos. has a capital structure of 78 percent equity, 22 percent debt, and that its before-tax cost of debt is 14 percent while its cost of equity is 18 percent. Assume the appropriate weighted-average tax rate is 21 percent and JB estimates that they can make full use of the interest tax shield. What will be JB's WACC? (Round your answer to 2 decimal places.) WACC % MacBook A
Suppose that JB Cos. has a capital structure of 78 percent equity, 22 percent debt, and that its before-tax cost of debt is 12 percent while its cost of equity is 16 percent. Assume the appropriate weighted-average tax rate is 21 percent and JB estimates that they can make full use of the interest tax shield.What will be JB’s WACC? (Round your answer to 2 decimal places.) WACC: ___.__%
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Suppose that you have the following utility function: U=E(r) – ½ Aσ2 and A=3 Suppose that you have $10 million to invest for one year and you want to invest that money into ETFs tracking the S&P 500 (US) and S&P/TSX 60 (Canada) index, which are often used as proxies for the US and Canadian stock markets, respectively, and the Canadian one-year T-bill. Assume that the interest rate of the one-year T-bill is 0.35% per annum. You have found two ETFs that you are interested in. From a set of their historical data between 2001 and 2019, you have estimated the annual expected returns, standard deviations, and covariance as follows: ETFUS : E(r)= 0.070584 0.173687 ETFCDA : E(r)= 0.073763 0.16816 Covariance between ETFUS and ETFCDA = 0.02397 Answer the following questions using Excel: Determine your optimal asset allocation among ETFUS , ETFCDA , and T-bill, in percentage and in dollar amounts. Also submit an Excel file to show your…
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