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evablogger [386]
3 years ago
10

Two companies, A and B, both have $1 million in assets, earnings before interest and taxes (EBIT) of $160,000, and the same tax

rate. Company A is all equity financed, and Company B is 50% debt financed and 50% equity financed. If Company B's pretax cost of debt is 8%, then Company A will have a ROA that is _____ and a ROE that is _____ than Company B's. a. Option D b. Option C c. Option B d. Option A
Business
1 answer:
Paladinen [302]3 years ago
5 0

Answer: higher; lower

Explanation:

EBIT for A = 160,000

Equity of A = 1,000,000

ROA of A = 160,000/1,000,000 = 0.16 = 16%

ROE of A = 160,000/1,000,000 = 0.16 = 16%

EBIT for B = 160000 - (1000000 × 50% × 8%) = 120000

Equity of B = 1000000 × 50% = 500,000

ROA of B = 120000/1000000 = 0.12 = 12%

ROE of B = 120000/500000 = 0.24 = 24%

From the above, we can see that Company A has a higher ROA but had a lesser ROE THAN B

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Answer:

20.1%

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Please note that <em>(market index return - risk-free rate of return)</em> is equal to <em>market risk premium</em>

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6 0
3 years ago
a study in the construction industy found that when equipment was stolen from worksites, in 82% of the cases workers were the th
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Employers in the construction sector would benefit most from the validation of personnel selection information to aid in reducing employee theft.

<h3>What is validation?</h3>
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4 0
1 year ago
A company has two products: A1 and B2. It uses activity-based costing and has prepared the following analysis showing budgeted c
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$4.00

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To calculate the approximate overhead cost per unit of product A1 under activity - based costing we have it as

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As our overhead unit of product

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3 years ago
Suppose 90-day investments in Britain have a 6% annualized return and a 1.5% quarterly (90-day) return. In the U.S., 90-day inve
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3 years ago
Zoe runs a flower shop. She recently made some changes so that one employee answers phones and completes the order and payment p
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