Firms U and L each have the same amount of assets, and both have a basic earning

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?




a)The two companies have the same times interest earned (TIE) ratio.

b)Firm L has a lower ROA than Firm U.

c)Firm L has a lower ROE than Firm U.

d)Firm L has the higher times interest earned (TIE) ratio.

e)Firm L has a higher EBIT than Firm U.

Explanation / Answer

Firm L has a lower ROA than Firm U

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