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Question
Firms U and L both have a return on invested capital (ROIC) of 12% and each has the same amount of assets. 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 an after-tax cost of 4.8%. Both firms have positive net income. Which of the following statements is CORRECT?a. Firm L has a lower ROA than Firm U.
b. Firm L has a lower ROE than Firm U.
c. Firm L has the higher times interest earned (TIE) ratio.
d. Firm L has a higher EBIT than Firm U.
e. The two companies have the same times interest earned (TIE) ratio.
Answer
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