CONCEPTUAL: RETURN ON EQUITY Which of the following statements is most correct?

(Hint: Work Problem 4-16 before answering 4-17 and consider the solution setup for 4-16 as you think about 4-17.)

a. If a firm’s expected basic earning power (BEP) is constant for all of its assets and exceeds the interest rate on its debt, adding assets and financing them with debt will raise the firm’s expected return on common equity (ROE).

b. The higher a firm’s tax rate, the lower its BEP ratio, other things held constant.

c. The higher the interest rate on a firm’s debt, the lower its BEP ratio, other things held constant.

d. The higher a firm’s debt ratio, the lower its BEP ratio, other things held constant.

e. Statement a is false; but statements

b, c, and d are true.

4-18 TIE RATIO AEI Incorporated has $5 billion in assets, and its tax rate is 40%. Its basic earning power (BEP) ratio is 10%, and its return on assets (ROA) is 5%. What is AEI’s timesinterest-

earned (TIE) ratio?

AppendixLO1