You Are Considering a Stock Investment in One of Two

question 32

Multiple Choice

You are considering a stock investment in one of two firms (AllDebt, Inc. and AllEquity, Inc.) , both of which operate in the same industry and have identical operating income of $600,000. AllDebt, Inc. finances its $1.2 million in assets with $1 million in debt (on which it pays 10 percent interest annually) and $0.2 million in equity. AllEquity, Inc. finances its $1.2 million in assets with no debt and $1.2 million in equity. Both firms pay a tax rate of 30 percent on their taxable income. What are the asset funders' (the debt holders and stockholders) resulting return on assets for the two firms?

• A) 29.17%, and 35%, respectively
• B) 37.5%, and 35%, respectively
• C) 37.5%, and 37.5%, respectively
• D) 50%, and 50%, respectively

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Definitions:

Accounts Receivable Turnover

This is a financial ratio that measures how effectively a company collects debts from its credit customers, indicating the number of times average accounts receivable are collected during a period.

Sales In Receivables

Accounts receivable that result from sales transactions, indicating the amount of money customers owe a company.

Decimal Place

A position of a number to the right of the decimal point, indicating fractions of a base unit.

Percentages

A mathematical concept that represents a number or ratio as a fraction of 100.