Suppose That Pop's Cycles,Inc

question 62

Multiple Choice

Suppose that Pop's Cycles,Inc.has a ROA of 7% and pays a 6% coupon on its debt.Pop's has a capital structure that is 70% equity and 30% debt.Relative to a firm that is 100% equity-financed,Pop's Net Profit will be ________ and its ROE will be _______.

• A) lower,lower
• B) lower,higher
• C) higher,lower
• D) higher,higher
• E) It is impossible to predict.

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Definitions:

Tax Rate

The rate at which a person or business is taxed by the government.

Tax Proration

The division or allocation of taxes between parties (such as buyers and sellers) based on their period of ownership or usage.

Annual Tax Bill

The total amount of tax owed by an individual or corporation in a given fiscal year.

Taxable Income

The amount of income that is used to calculate how much tax an individual or a company owes to the government.