Firms U and L Both Have a Basic Earning Power

question 36

Multiple Choice

Firms U and L both have a basic earning power ratio of 20% and each has the same amount of assets.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) Firm L has a lower ROA than Firm U.
• B) Firm L has a lower ROE than Firm U.
• C) Firm L has the higher times interest earned (TIE) ratio.
• D) Firm L has a higher EBIT than Firm U.
• E) The two companies have the same times interest earned (TIE) ratio.

---

Definitions:

HR Database

A comprehensive system that stores, manages, and retrieves information related to the human resources of an organization, including personal details, employment history, and performance data.

Software Solutions

Computer programs or sets of programs designed to address specific user needs or solve particular problems.

Workforce Analytics Applications

Software tools and systems that analyze employee-related data to help organizations make informed decisions about workforce management and development.

Business Intelligence

The use of data analysis tools and techniques to gather and process business information to aid decision-making.