. Company A and Company B have the same tax rate, the same total assets, and the
ID: 2683510 • Letter: #
Question
. Company A and Company B have the same tax rate, the same total assets, and the same basic earning power. Both companies have a basic earning power that exceeds their before-tax costs of debt, rd. However, Company A has a higher debt ratio and higher interest expense than Company B. Which of the following statements is CORRECT? (ROA = Net Income / Assets and ROE = Net Income / Equity)
a. Company A has a higher net income than Company B.
b. Company A has a lower ROA than Company B.
c. Company A has a lower ROE than Company B.
d. The two companies have the same ROA.
e. The two companies have the same ROE.
Explanation / Answer
c. Company A has a lower ROE than Company B.
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