Suppose Firms a and B Have the Same Amount of Assets,total

question 78

True/False

Suppose Firms A and B have the same amount of assets,total assets are equal to total invested capital,pay the same interest rate on their debt,have the same basic earning power (BEP),finance with only debt and common equity,and have the same tax rate.However,Firm A has a higher debt to capital ratio.If BEP is greater than the interest rate on debt,Firm A will have a higher ROE as a result of its higher debt ratio.

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Definitions:

U.S. Treasury Deposits

Accounts maintained by the U.S. Treasury, which include funds used for the daily operations of the government.

Discount Rate

This refers to the cost of borrowing for commercial banks and various deposit institutions, derived from their area's Federal Reserve Bank lending service.

Banks Borrow

Banks borrow refers to the process by which banks take loans from other banks, financial institutions, or the central bank to maintain liquidity and meet their loan obligations to depositors.

Cash Reserves

Funds that a person or entity keeps on hand to meet short-term and emergency funding needs.