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?

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 correcta. .

Answer 1

Answer:

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

Explanation:

Answer 2

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

What is the return on assets?

Return on assets (ROA) determines the company's efficiency in using its assets to make profits. Higher ROA means more profitability. The formula to calculate ROA is:

$\rm ROA = \dfrac{Net \:Income}{Total\:Assets}$

A firm having debt is likely to have less ROA than a firm having equity since debts decrease the net income by way of interest.

Therefore the correct statement is a.

Learn more about return on asset here:

https://brainly.com/question/4298617