You Are Considering a Stock Investment in One of Two

question 116

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 $3 million. AllDebt, Inc. finances its $6 million in assets with $5 million in debt (on which it pays 5 percent interest annually) and $1 million in equity. AllEquity, Inc. finances its $6 million in assets with no debt and $6 million in equity. Both firms pay a tax rate of 40 percent on their taxable income. What are the asset funders' (the debt holders and stockholders) resulting return on assets for the two firms?

• A) 27.5%, and 30%, respectively
• B) 31.67%, and 30%, respectively
• C) 33%, and 30%, respectively
• D) 50%, and 50%, respectively

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Definitions:

On-demand Music

A service or platform that allows users to listen to music any time, typically via the internet, without needing to download files.

Spotify

A digital music service that provides access to millions of songs, podcasts, and videos from artists all over the world.

Apple Music

A music and video streaming service developed by Apple Inc., allowing users to listen to their music library and access a vast library of songs and playlists.

Great Firewall

A term used to describe the strict internet censorship and surveillance employed by the Chinese government to regulate the internet within China.