Company a Is Financed with 90 Percent Debt, Whereas Company

question 52

Multiple Choice

Company A is financed with 90 percent debt, whereas Company B, which has the same amount of total assets, is financed entirely with equity. Both companies have a marginal tax rate of 35 percent. Which of the following statements is most correct?

• A) If the two companies have the same basic earning power (BEP), Company B will have a higher return on assets.
• B) If the two companies have the same return on assets, Company B will have a higher return on equity.
• C) If the two companies have the same level of sales and basic earning power (BEP), Company B will have a lower profit margin.
• D) All of the answers above are correct.
• E) None of the answers above is correct.

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