9. 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, r_d. However, Company A has a higher debt ratio. Which of the following statements is correct?

a. Company A has a higher net income than Company B.

b. Company B has a lower ROA than Company A.

c. Company A has a higher ROE than Company B.

d. Company B has a lower WACC than Company A.

10. Which statement is False?

a. Adding debt will increase the firms ROE as long as the cost of debt is less than their Basic Earning Power.

b. The level of debt does NOT affect the business risk of a firm.

c. If a company increases its level of debt, then its Net Income will increase

d. According to the tradeoff model of capital structure, the costs of debt and equity will both rise as the level of debt increases.

25. Thomson Engineering is issuing new 10-year bonds that have 20 warrants attached. If not for the attached warrants, the bonds would carry a 9% interest rate. However, with the warrants attached the bonds will pay a 7% annual coupon and still sell for the face value of $1,000. What is the value of each warrant?

a) $6.42 b) $7.15 c) $8.29 d) $9.10