Two Companies, a and B, Both Have $1million in Assets

question 96

Multiple Choice

Two companies, A and B, both have $1million in assets, net income before interest and taxes (EBIT) of $160,000, and the same tax rate. Company A is all equity financed and B is 50% debt financed and 50% equity financed. If B's pre-tax cost of debt is 8%, then Company A will have a ROA that is ____ and a ROE that is _______ than B's. $$\begin{array} { | l | l | l | } \hline & \text { A's ROA } & \text { A's ROE } \\\hline \text { A) } & \text { higher } & \text { same } \\\hline \text { B) } & \text { higher } & \text { higher } \\\hline \text { C) } & \text { same } & \text { same } \\\hline \text { D) } & \text { same } & \text { lower } \\\hline\end{array}$$

• A) Option A
• B) Option B
• C) Option C
• D) Option D

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Definitions:

Command-And-Control

Regulatory strategies where the government sets specific limits or commands for compliance, often used in environmental policy to limit pollution.

Market-Based Policy

Market-based policy refers to regulatory or economic policy approaches that leverage market mechanisms to guide economic activities towards desired outcomes.

Pollutants

Substances introduced into the environment that cause harm or discomfort to the ecosystem or living organisms.

Corrective Taxes

Taxes implemented to correct the market outcomes that are not efficient by internalizing external costs, often used in environmental policy to address pollution.