You 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 $23.5 million. NoEquity, Inc. finances its $70 million in assets with $69 million in debt (on which it pays 10 percent interest annually) and $1 million in equity. NoDebt, Inc. finances its $70 million in assets with no debt and $70 million in equity. Both firms pay a tax rate of 30 percent on their taxable income. Required:
Calculate the net income and return on assets for the two firms.

Investment in NoEquity, Inc. and NoDebt, Inc.

                                   NoEquity, Inc.     NoDebt, Inc.

Net Income                $11.62 million      $16.45 million

Return on assets       16.6%                   23.5%

Explanation:

a) Data and Calculations:

                                    NoEquity, Inc.    NoDebt, Inc.

Investments:

Debt                            $69 million          $0

Equity                            $1 million           $70 million

Assets                         $70 million          $70 million

Operating income      $23.5 million      $23.5 million

Interest (10%)                  6.9 million           0

Income before tax     $16.6 million       $23.5 million

Tax expense (30%)      4.98 million          7.05 million

Net Income                $11.62 million      $16.45 million

Return on assets      $11.62/$70           $16.45/$70

                            =    0.166                    0.235

                            =    16.6%                   23.5%

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