ASNWER2

PART a:

Interest rate will be zero as all the three firms are equity financed shumaila already has a 0% interest
debt.

PART b:

Financial charges in of all the three companies in case of good economic environment,

Financial charges = operating income x tax rate

= 100 million x 25%

= 25 million

In case of average economic environment:

Financial charges = Operating income x tax rate

= 50 million x 25%

= 12.5 million

In case of poor economic environment:

Financial charges = Operating income x 25%

= 25 million x 25%

= 6.25 million

PART c:

Operating income (good) = 10% of COGS

100,000,000 = 10% of COGS

Therefore,

COGS = 100,000,000/10%
 = 1000,000,000

Now COGS and gross profit are equal hence sales must be double of COGS, therefore,

Value of sales = 1000,000,000 x 2

= 2000,000,000 or 2000 million

Now sales for each corporation = 2000 million x 1/3

= 666.667 million