Consider the following financial information for Atlas Awesome Manufacturing, Inc., and Delilah Superior Manufacturing, Inc. Both companies are in the same industry and have identical operating income of $8.4 million. Atlas finances its $15 million in assets with $2 million in debt (on which it pays 9 percent interest) and $13 million in equity. Delilah finances its $15 million in assets with $12 million in debt (on which it pays 8 percent interest). Both companies pay 32 percent tax on their taxable income. Calculate the following:
- Each firm’s net income
- The income each firm has available to pay its debtholders and stockholders (the firm’s asset funders)
- The returns available to the asset funders on their investment in each company (the return on asset-funders’ investment)
Which company offers a higher return on investment to its asset funders? Explain why this company is able to offer a higher return on investment to its asset funders.
