Firms U and L Both Have a Basic Earning Power

question 15

Multiple Choice

Firms U and L both have a basic earning power ratio of 20% and each has the same amount of assets.Firm U is unleveraged, i.e., it is 100% equity financed, while Firm L is financed with 50% debt and 50% equity.Firm L's debt has a before-tax cost of 8%.Both firms have positive net income.Which of the following statements is CORRECT?

• A) Firm L has a lower ROA than Firm U.
• B) Firm L has a lower ROE than Firm U.
• C) Firm L has the higher times interest earned (TIE)ratio.
• D) Firm L has a higher EBIT than Firm U.
• E) The two companies have the same times interest earned (TIE)ratio.

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Definitions:

Experimenter

An individual conducting a controlled test to examine a hypothesis in a scientific study.

Safety

Safety encompasses the conditions and practices that protect people from harm, injury, or danger in various environments and activities.

Milgram's Experiment

A psychological experiment conducted by Stanley Milgram to study obedience to authority, revealing people's willingness to follow orders even when they cause harm.

Obedience

The act of following the directives or commands from an authority figure, often studied in social psychology.