Suppose Two Firms with the Same Amount of Assets Pay

question 14

True/False

Suppose two firms with the same amount of assets pay the same interest rate on their debt and earn the same rate of return on their assets,and that ROA is positive.However,one firm has a higher debt ratio.Under these conditions,the firm with the higher debt ratio will also have a higher rate of return on common equity.

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Definitions:

Cash Inflows

The total amount of money being transferred into a business, project, or financial product from various sources.

Discount Rate

The interest rate applied for computing the present value of future cash flows in DCF scrutiny.

Average Book Value

The mean value of a company's assets or investments, as recorded on its financial statements over a specific period of time.

Average Net Income

The mean amount of net earnings calculated over a specified period, indicating the profitability of a business after all expenses have been subtracted from revenues.