Suppose Firms a and B Have the Same Amount of Assets

question 93

True/False

Suppose Firms A and B have the same amount of assets, pay the same interest rate on their debt, have the same basic earning power (BEP), and have the same tax rate.However, Firm A has a higher debt 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.

---

Definitions:

Operating Income

The profit realized from a business's core operations, calculated before interest and taxes.

Average Fixed Assets

The mean value of a company's fixed assets, like plant and equipment, calculated over a specific period of time.

Double-Declining Balance Method

A method of accelerated depreciation calculating an asset's loss of value at double the rate of the straight-line depreciation method.

Depreciation Expense

The allocated amount of an asset's cost that is written off as an expense over its useful life, reflecting the consumption of the asset.