2. Company A and Company B had the following balance sheets as of December 31, 20N5 (thousands of dollars)
Current assets
Fixed assets (net)
Total assets
Short-term liabilities
Long-term liabilities
Common stock
Retained earnings
Total liabilities and
equity
Company A
200 000
130 000
330 000
40 000
70 000
50 000
50 000
Company B
140 000
90 000
230 000
70 000
20 000
70 000
50 000
210 000
210 000
Earnings before interest and taxes for both firms are $40 million, and the effective federal plus-state tax
rate is 20%
a
What is the return on equity and return on total assets for each firm if the interest rate on short
term liabilities is 9% and the rate on long-term liabilities is 15%?
b. Assume that the short-term rate rises until 15% and the rate on long-term debt remains
unchanged. What would be the returns on equity for both companies under these conditions?
c. Which company is in a riskier position? Why?

The gilbert instrument corporation is considering replacing the wood steamer it currently uses to shape guitar sides. the steamer has 6 years of remaining life. if kept,the steamer will have depreciaiton expenses of $650 for five years and $325 for the sixthyear. its current book value is $3,575, and it can be sold on an internet auction site for$4,150 at this time. if the old steamer is not replaced, it can be sold for $800 at the endof its useful life. gilbert is considering purchasing the side steamer 3000, a higher-end steamer, whichcosts $12,000 and has an estimated useful life of 6 years with an estimated salvage value of$1,500. this steamer falls into the macrs 5-year class, so the applicable depreciationrates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. the new steamer is fasterand allows for an output expansion, so sales would rise by $2,000 per year; the newmachine's much greater efficiency would reduce operating expenses by $1,900 per year.to support the greater sales, the new machine would require that inventories increase by$2,900, but accounts payable would simultaneously increase by $700. gilbert's marginalfederal-plus-state tax rate is 40%, and its wacc is 15%.a. should it replace the old steamer? b. npv of replace = $2,083.51