Firms U and L Each Have the Same Amount of Assets

question 2

Multiple Choice

Firms U and L each have the same amount of assets, and both have a basic earning power ratio of 20%. 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 a before-tax cost of 8%. Both firms have positive net income. 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:

Church and State

The phrase "church and state" refers to the relationship between religious organizations and the government, often emphasizing the degree of separation between them.

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A geographical region of England, marked by its distinct cultural, historical, and economic identities, and typically considered to include areas such as Yorkshire, the North East, and the North West.

Test Act

Legislation passed in 1673 in England, requiring all civil and military officials to profess the Protestant faith, effectively excluding Catholics from office.