Firms U and L Each Have the Same Amount of Assets,investor-Supplied

question 32

Multiple Choice

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) The two companies have the same times interest earned (TIE)ratio.
• B) Firm L has a lower ROA than Firm U.
• C) Firm L has a lower ROE than Firm U.
• D) Firm L has the higher times interest earned (TIE)ratio.
• E) Firm L has a higher EBIT than Firm U.

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Definitions:

Psychoanalytic Theory

A theory of personality and therapeutic technique that attributes thoughts and actions to unconscious motives and conflicts, developed by Sigmund Freud.

Object-relations School

A psychoanalytic theory focusing on relationships with others and the external and internal objects people form attachments to, shaping personality.

Rigid Boundaries

Strict limits set in relationships or systems that are difficult to adjust or cross.

Heritability

A statistical estimate of the proportion of observed variation in a particular trait among individuals in a population that is due to genetic differences.