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djverab [1.8K]
2 years ago
15

Firms U and L each have the same amount of assets, investor-supplied capital, and both have a return on investors' capital (ROIC

) of 12%. Firm U is unleveraged, i.e., it is 100% equity financed, while Firm L is financed with 50% debt and 50% equity. Firm L's debt has an after-tax cost of 8%. Both firms have positive net income and a 35% tax rate. Which of the following statements is CORRECT? a. Firm L has a lower ROE than Firm U. b. The two companies have the same times interest earned (TIE) ratio. c. Firm L has a lower ROA than Firm U. d. Firm L has the higher times interest earned (TIE) ratio. e. Firm L has a higher EBIT than Firm U.
Business
1 answer:
Tanya [424]2 years ago
4 0

Answer:

The correct option is a.

Explanation:

In the question, it is given that there are two firms namely U and L who has same same amounts of assets, investor supplied material, and Return on investor capital.

The Firm U is unleveraged which has 100% equity

whereas,  Firm L is leveraged firm which has 50% debt and 50% equity

As we have to compare these two firms based on return on equity.

So, based on ROE, Firm U has 100% equity so it have more equity

And, the Firm L have 50% equity which means the firm has low equity as 50% contribution is gone to the debt.

The rest information which is given in the question is irrelevant. So, it is ignored.

Thus, the Firm L has a lower ROE than Firm U

Hence, the correct option is a.

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Answer:

                                  Journal Entry

Date   Account Titles and Explanation         Debit          Credit

Jan 1   Cash                                                    $511,875

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2 years ago
Henry conducted a survey on an ad done by his company. In the survey, he asked people to evaluate the ad and state whether they
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C. rating scale test.

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2 years ago
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Answer:

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