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You are considering a stock investment in one of two firms

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You are considering a stock investment in one of two firms (AllDebt,
Inc., and AllEquity, Inc.), both of which operate in the same industry and have identical operating income of $10.00 million. AllDebt, Inc., finances its $40 million in assets with $39 million in debt (on which it pays 10 percent interest annually) and $1 million in equity. AllEquity, Inc., finances its $40 million in assets with no debt and $40 million in equity. Both firms pay a tax rate of 30 percent on their taxable income.

Calculate the income available to pay the asset funders (the debt holders and stockholders) and resulting return on asset-funders’ investment for the two firms

 
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