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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 correct? A. If the two companies have the same basic earning power (BEP), Company B will have a higher return on assets.  B. If the two companies have the same return on assets, Company B will have a higher return on equity.  C. If the two companies have the same level of sales and basic earning power (BEP), Company B will have a lower profit margin.  D. All of the answers above are correct.  E. None of the answers above is correct.

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 correct? A. If the two companies have the same basic earning power (BEP), Company B will have a higher return on assets.  B. If the two companies have the same return on assets, Company B will have a higher return on equity.  C. If the two companies have the same level of sales and basic earning power (BEP), Company B will have a lower profit margin.  D. All of the answers above are correct.  E. None of the answers above is correct.

Financial Reporting, Financial Statement Analysis and Valuation
Financial Reporting, Financial Statement Analysis and Valuation
8th Edition
ISBN:9781285190907
Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Chapter10: Forecasting Financial Statement
Section: Chapter Questions
Problem 8QE
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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 correct?

  • A. If the two companies have the same basic earning power (BEP), Company B will have a higher return on assets.
  •  B. If the two companies have the same return on assets, Company B will have a higher return on equity.
  •  C. If the two companies have the same level of sales and basic earning power (BEP), Company B will have a lower profit margin.
  •  D. All of the answers above are correct.
  •  E. None of the answers above is correct.

 

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