Assume That You Are Comparing Two Firms Which Are Identical,with

question 36

Multiple Choice

Assume that you are comparing two firms which are identical,with one exception.Firm A is an all-equity firm and firm B has a debt-equity ratio of 0.60.All else equal,firm A will:

• A)generate a higher EBIT,but lower net income than firm B
• B)generate a lower EBIT,but higher net income than firm B
• C)always have higher EPS than firm B,since it has no interest expense
• D)have lower EPS than firm B when the level of earnings before interest and taxes (EBIT)is relatively high
• E)have lower EPS than firm B when the level of EBIT is relatively low

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Definitions:

Revenue Expenditures

Expenditures that are immediately charged against revenues in the period they are incurred, typically related to the maintenance and repair of assets.