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:

Psychological Disorders

Patterns of behavioral or psychological symptoms that impact multiple areas of life, leading to significant distress and impairment in functioning.

Effective Treatment

Therapeutic interventions or approaches that have proven to result in significant improvements in health or well-being, supported by scientific evidence.

Repressed

Describes thoughts, memories, or desires that have been unconsciously blocked due to being considered unacceptable or traumatic.

Serious Auto Accident

A significant vehicular collision resulting in severe damage, injuries, or fatalities.