Section C (4 Mark)Company A is financed with 90 percent debt, whereas Company B, which...

Question

Section C (4 Mark)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?

Accepted Answer

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

Answer

B. If the two companies have the same return on assets, Company B will have a higher return on equity.

Answer

C. If the two companies have the same level of sales and basic earning power (BEP), Company B will have a lower profit margin.

Answer

D. All of the answers above are correct.

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AAFM Chartered Wealth Manager CWM_LEVEL_2 Question # 292 Topic 31 Discussion

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