Company A is financed with 90 percent debt, whereas Company B, which has the sam

Question

Company A is financed with 90 percent debt, whereas Company B, which has the same amount of total assets, is financed entirely with equity. Both companies have a marginal tax rate of 35 percent. Which of the following statements is most correct?

Question 6 options:

If the two companies have the same basic earning power (BEP), Company B will have a higher return on assets.

If the two companies have the same return on assets, Company B will have a higher return on equity.

If the two companies have the same level of sales and basic earning power (BEP), Company B will have a lower profit margin.

All of the answers above are correct.

None of the answers above is correct.

Explanation / Answer

option a is correct.

As company is financed majorly by debt so it will have more debt cost and hence less earnings than company B which is fully equity financed.So ROA of company B will be higher than company A.

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