Suppose That Chicken Express, Inc

question 1

Multiple Choice

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

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

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Definitions:

Chi-squared Distribution

A probability distribution that describes the distribution of the sum of the squares of variables that are independently distributed according to a standard normal distribution.

Degrees of Freedom

The number of independent values or quantities that can vary in an analysis without violating any constraints.

Hypothesis Test

A procedure in statistics to determine if there is enough evidence to reject a null hypothesis in favor of an alternative hypothesis.

Chi-square Distribution

A statistical distribution used particularly in hypothesis testing, derived from the sum of the squares of a set of variables that follow a normal distribution.