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:

Illuminate

To light up or brighten a space; in a metaphorical sense, it can also mean to clarify or make something clear and understandable.

Paving Cost

Expenses related to the laying of a pavement, including materials and labor.

Land Improvements

Enhancements made to a parcel of land to increase its value, such as landscaping, fencing, and infrastructure development.

Revenue Expenditure

Expenditures that are immediately charged against revenues as an expense of the period in which they are incurred, often related to the costs of day-to-day operations.