Ou are considering a stock investment in one of two firms (NoEquity, Inc. and NoDebt, Inc.), both of which operate in the same industry and have identical operating income of $22.5 million. NoEquity, Inc. finances its $80 million in assets with $79 million in debt (on which it pays 10 percent interest annually) and $1 million in equity. NoDebt, Inc. finances its $80 million in assets with no debt and $80 million in equity. Both firms pay a tax rate of 30 percent on their taxable income. Calculate the net income and return on assets for the two firms. (Enter your dollar answers in millions of dollars.

Explanation:

a) No Equity Inc:

Net Income = (EBIT – Interest) * (1-T) = (22.5– 79 * 0.10) * (1-0.30)

= 14.6 * 0.7  = 10.22

Return on assets = Net Income / Total Assets = 10.22 / 80 = 12.775%

b) No Debt Inc:

Net Income = (EBIT – Interest) * (1-T) = (22.5 – 0) * (1-0.30)

= 22.5 * 0.7   = 6.75

Return on assets = Net Income / Total Assets = 6.75 / 40 = 16.875%

cognitive overload: having a lot on your mind impairs decision-making and tends to result in the simplest, but not necessarily best, option being selected.

empathy gaps: overlooking how you might feel in a different situation can result in unnecessary purchases, such as overbuying when shopping for food on an empty stomach.

optimism and overconfidence: wearing rose-tinted glasses and having unrealistic expectations about the future can affect money management and leave you unprepared for a change in circumstance.

instant gratification: seeking instant gratification drives impulsive spending and can undermine long-term planning and savings.

harmful habits: automatic or mindless behaviour can amplify a poor financial decision as it becomes a recurring event.

social norms: we are heavily influenced by the actions of others; while this can be in certain circumstances, it also contributes to the pressure to keep up with the joneses through conspicuous consumption.

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