Firm a Is Very Aggressive in Its Use of Debt

question 1

Multiple Choice

Firm A is very aggressive in its use of debt to leverage up its earnings for common stockholders, whereas Firm NA is not aggressive and uses no debt. The two firms' operations are identical--they have the same total investor-supplied capital, sales, operating costs, and EBIT. Thus, they differ only in their use of financial leverage (wd) . Based on the following data, how much higher or lower is A's ROE than that of NA, i.e., what is ROEA - ROENA?

• A) 8.60%
• B) 9.06%
• C) 9.53%
• D) 10.01%
• E) 10.51%

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Definitions:

Permanent/Temporary

Describes the nature of employment or accounting entries; permanent implies longevity or continuity, whereas temporary indicates a limited duration or interim status.

Normal Balance

The normal balance is the side (debit or credit) of an account that is expected to have a higher balance based on the accounting equation.

Financial Statement(s)

Reports summarizing the financial performance, position, and cash flows of a business over a specified period, including balance sheet, income statement, and cash flow statement.

Permanent/Temporary

Defines classifications of accounts in accounting where permanent accounts refer to balance sheet items that carry over into the next fiscal period, while temporary accounts are closed at the end of each accounting period.