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Rakhi Vasavada
Rakhi Vasavada , Financial and Legal Consultant
Category: Finance
Satisfied Customers: 4419
Experience:  Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
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Firms U and L each have the same amount of assets, and both

Resolved Question:

Firms U and L each have the same amount of assets, and both have a basic earning power ratio of 20%. 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?
Submitted: 5 years ago.
Category: Finance
Expert:  Rakhi Vasavada replied 5 years ago.

Dear Friend,

 

The question here is incomplete. You have not stated the statements out of which you are asking which one is correct.

 

However, I have this textbook and I presume the choices are the following:

 

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

 

Out of these, the correct statement is ::

 

Firm L has a lower ROA than Firm U

 

I hope this helps...

Warm Regards,

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