You Are Considering a Stock Investment in One of Two

question 116

Multiple Choice

You are considering a stock investment in one of two firms (AllDebt, Inc. and AllEquity, Inc.) , both of which operate in the same industry and have identical operating income of $3 million. AllDebt, Inc. finances its $6 million in assets with $5 million in debt (on which it pays 5 percent interest annually) and $1 million in equity. AllEquity, Inc. finances its $6 million in assets with no debt and $6 million in equity. Both firms pay a tax rate of 40 percent on their taxable income. What are the asset funders' (the debt holders and stockholders) resulting return on assets for the two firms?

• A) 27.5%, and 30%, respectively
• B) 31.67%, and 30%, respectively
• C) 33%, and 30%, respectively
• D) 50%, and 50%, respectively

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Definitions:

Sclerenchyma

A type of plant tissue composed of thick-walled, dead cells that provide structural support.

Meristems

Regions of plant growth where undifferentiated cells continue to divide and contribute to the formation of new organs.

Trichomes

Hairlike outgrowths on the epidermis of plants that serve various functions, including defense against pests and protection from excessive transpiration.

Parenchyma

A type of plant tissue consisting of living cells that are often large and have various functions such as photosynthesis, storage, and secretion.