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:

Polygraph Tests

Examination techniques that measure and record physiological indicators such as blood pressure and heart rate to determine truthfulness.

Reliability

The degree to which an assessment tool or measurement consistently produces stable and accurate results over repeated uses.

Achievement Tests

Tests that measure a person's existing knowledge and skills.

Production Employees

Workers directly involved in manufacturing goods or providing services in industries such as automotive, electronics, textiles, and food processing.