Suppose Two Firms with the Same Amount of Assets Pay

question 14

True/False

Suppose two firms with the same amount of assets pay the same interest rate on their debt and earn the same rate of return on their assets,and that ROA is positive.However,one firm has a higher debt ratio.Under these conditions,the firm with the higher debt ratio will also have a higher rate of return on common equity.

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Definitions:

Average Net Income

The mean amount of net earnings calculated over a specified period, indicating the profitability of a business after all expenses have been subtracted from revenues.

Accounting Return

A measure of profitability in relation to various accounting measures, such as net income or assets.

Average Accounting Return (AAR)

An investment’s average net income divided by its average book value.

Return on Equity (ROE)

A measure of financial performance calculated by dividing net income by shareholders' equity, reflecting the profitability relative to the equity.