You Are Considering a Stock Investment in One of Two

question 71

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 $400,000. AllDebt, Inc. finances its $800,000 in assets with $600,000 in debt (on which it pays 5 percent interest annually) and $200,000 in equity. AllEquity, Inc. finances its $800,000 in assets with no debt and $800,000 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) 32.375%, and 35.00%, respectively
• B) 36.125%, and 35.00%, respectively
• C) 46.25%, and 50%, respectively
• D) 50%, and 50%, respectively