Final answer:
The debt-equity ratios are 1/3 for Company L and 3 for Company LL. The debt-to-assets ratios are 1/4 for Company L and 3/4 for Company LL. Net income is $10 million for each company. Interest on debt is $1.25 million for Company L and $3.75 million for Company LL. The return on equity and return on assets are both 10% for each company.
Step-by-step explanation:
Debt-Equity and Debt-to-Assets:
To calculate the debt-equity ratio, we divide total debt by total equity. For Company L, the debt-equity ratio is 0.25 / 0.75 = 1/3. For Company LL, the debt-equity ratio is 0.75 / 0.25 = 3.
To calculate the debt-to-assets ratio, we divide total debt by total assets. For Company L, the debt-to-assets ratio is 0.25 / 1 = 1/4. For Company LL, the debt-to-assets ratio is 0.75 / 1 = 3/4.
Net Income:
Since the companies have identical operating earnings of $10 million and no information is given about expenses, we can assume that net income is also $10 million for each company.
Interest on Debt:
To calculate interest on debt, we multiply total debt by the interest rate. For Company L, the interest on debt is 0.25 * $100 million * 0.05 = $1.25 million. For Company LL, the interest on debt is 0.75 * $100 million * 0.05 = $3.75 million.
Return on Equity:
Return on equity is calculated by dividing net income by equity. For each company, the return on equity is $10 million / $100 million = 0.1 or 10%.
Return on Assets:
Return on assets is calculated by dividing net income by total assets. For each company, the return on assets is $10 million / $100 million = 0.1 or 10%.