Quote Originally Posted by sprintist View Post
Assume that a firm has $1,000,000 worth of assets, which are funded by $600,000 of debt and $400,000 of equity. Assume the return the firm can earn on its assets is 10% p.a. Calculate the available rate of return to equity holders of the firm.
0% if the firm filed for bankruptcy as the debtor collect all

as for non bankruptcy case... assuming that 10% of 1M net earning (after task, after servicing debt, after pay all cost?)
if yes then the company can decide to do with that $100K
- return all to investor, thus $100k goes to equity $400k, return is 25%
- re-invest some to business (you never say how much re-invested)
- re-invest all to business, return is 0% this time round
- use some to reduce debt (you never say how much used to reduce debt)
- use all to reduce debt, return is 0% this time round
- some combo or debt reduction and re-invest to business ... gah I never study business but these are my creative answer