Question
Firms U and L each have the same amount of assets, and both have a basic earning power ratio of 20%. Firm U is unleveraged,
Firms U and L each have the same amount of assets, and both have a basic earning power ratio of 20%. Firm U is unleveraged, i.e., it is 100% equity financed, while Firm L is financed with 50% debt and 50% equity. Firm L's debt has a before-tax cost of 8%. Both firms have positive net income. Which of the following statements is CORRECT? a)The two companies have the same times interest earned (TIE) ratio. b)Firm L has a lower ROA than Firm U. c)Firm L has a lower ROE than Firm U. d)Firm L has the higher times interest earned (TIE) ratio. e)Firm L has a higher EBIT than Firm U. Please, provide DETAILED EXPLANATION!
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