Firm a Is Very Aggressive in Its Use of Debt

question 37

Multiple Choice

Firm A is very aggressive in its use of debt to leverage up its earnings for common stockholders, whereas Firm NA is not aggressive and uses no debt. The two firms' operations are identical they have the same total investor-supplied capital, sales, operating costs, and EBIT. Thus, they differ only in their use of financial leverage (wd) . Based on the following data, how much higher or lower is A's ROE than that of NA, i.e., what is ROEA ? ROENA? $\begin{array}{c}\begin{array}{lr}\underline{\text { Applicable to Both Firms }}\\ \text { Capital } \quad \$ 150,000 \\\text { EBIT } \quad \$40,000 \\\text { Tax rate } \quad 35 \%\end{array}\begin{array}{lll}\underline{\text { Firm A's Data }}\\ \mathrm{w}_{\mathrm{d}} \quad\quad\quad\quad 50 \% \\\text { Int. rate } \quad 12 \% \\\\\end{array}\begin{array}{lll}\underline{\text { Firm NA's Data }} \\\mathrm{w}_{\mathrm{d}} \quad\quad\quad\quad 0 \% \\\text { Int. rate } \quad 10 \%\\ \\\end{array}\end{array}$

• A) 8.60%
• B) 9.06%
• C) 9.53%
• D) 10.01%
• E) 10.51%

Identify the roles and responsibilities of key accounting positions within an organization.

Distinguish between different types of costs (direct materials, direct labor, and factory overhead).

Comprehend the role of managerial accounting in planning, controlling, and decision-making processes.

Appreciate the flexibility and creativity managerial accounting offers in internal decision-making.

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Definitions:

Producer Surplus

The difference between the amount producers are willing to accept for a good or service versus what they actually receive.

Tax

A compulsory financial charge imposed by a government on individuals, corporations, or other entities to fund government spending and public services.

Market Price

The current price at which a good or service can be bought or sold in a marketplace, determined by supply and demand.

Government Subsidy

Financial assistance provided by the government to support a specific industry, entity, or activity that is considered beneficial for the public.