Both firms have positive net income

Assignment Help Financial Management
Reference no: EM13953696

Please, explain in a very accurate and detailed way, provide logical and consistent answer. It is very important in this task. Provide VERY DETAILED explanation.

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.

Reference no: EM13953696

Questions Cloud

Conveyor belt systems-pretax annual operating costs : Hagar Industrial Systems Company (HISC) is trying to decide between two different conveyor belt systems. System A costs $276,000, has a four-year life, and requires $84,000 in pretax annual operating costs.
What is sparkling worth today : Sparkling Water, Inc., expects to sell 2.81 million bottles of drinking water each year in perpetuity. This year each bottle will sell for $1.30 in real terms and will cost $.91 in real terms. Sales income and costs occur at year-end. What is Sparkli..
Should the company accept the project : Sanders Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $284,000. The facility is to be fully depreciated on a straight-line basis over seven years. It is expected to have no resale value after the seven years..
Present value of the net cash flows from operations : Phillips Industries runs a small manufacturing operation. For this fiscal year, it expects real net cash flows of $201,000. Phillips is an ongoing operation, but it expects competitive pressures to erode its real net cash flows at 4 percent per year ..
Both firms have positive net income : 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 o..
These assets are considered to be operating assets : If a company holds its diversified portfolio the small portion of stocks of another company, that conducts operating activities in the same industry, than these assets are considered to be operating assets?
Interest rates and equity capital costs : If the price of money (e.g., interest rates and equity capital costs) increases due to an increase of anticipated inflation, the risk-free rate will also increase. If there is no change in investment aversion, then the market risk premium (r_M - r_RF..
Maturity than an otherwise identical noncallable bond : A bond that is callable has a chance of being retired earlier than it started turn to maturity. Therefore, if the yield curve is upward sloping, an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallabl..
Describes a protective put : Which of the following describes a protective put?

Reviews

Write a Review

 

Financial Management Questions & Answers

  Considering a new three-year expansion project

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $3 million. The fixed asset falls into the three-year MARCS class. The project is estimated to generate $2,180,000 in annual sales, ..

  Exchange rate systems-factors that affect exchange rates

Exchange rate systems vary in the degree to which a country’s central bank controls its currency’s exchange rate. This week’s discussion question centers on the use of foreign exchange markets. Discuss the four exchange rates forecasting methods and ..

  Calculate the average daily float

Your firm receives 10 checks per month. Of these, 6 are for $1,000 and 4 are for $500. The delay for the $1,000 checks is 5 days, and the $500 checks are delayed 8 days. Calculate the average daily float.

  Coupon bonds on the market-what is current bond price

Aloha Inc. has 7 percent coupon bonds on the market that have 14 years left to maturity. If the YTM on these bonds is 8.3 percent, what is the current bond price?

  Determines the equivalent equal monthly payment series

Suppose you borrow $28000 at 12% compounded monthly over five years. Knowing that the 12% represents the market interest rate, you realize that the monthly payment in actual dollars will be $622.84. If the average general monthly interest rate is exp..

  What will be amount of interest accumulated at the time

Emilys current salary is $85,000 per year, and she is planning to retire 24 years from now. She anticipates that her annual salary will increase by$1,000 each year ($85,000 the first year, to $86,000 the second year, $87,000 the third year, and so fo..

  Assume that project being considered has normal cash flows

Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.

  About the monthly payment

You want to buy a new sports car from Muscle Motors for $68,000. The contract is in the form of a 72-month annuity due at an APR of 6.75 percent. What will your monthly payment be?

  What kind of risks does the given pose to the firm

Three days later the trader vanishes and you find that $10 million of his account is now missing. What kind of risks does this pose to the firm?

  Managers replacing some stockholders with creditors

A firm with a 40% marginal tax rate pays $1000 in interest on bonds that have a 6% yield-to-maturity. Assuming the bonds will never be paid-off, the market value of the tax savings is: Accepting the first proposition means there is not an agency prob..

  What is the current value of their common stock

A company's ROE is 18%. Their dividend payout ratio is 80%. The last dividend just paid was $2.20. If dividends are expected to grow by the company's internal growth rate indefinitely, what is the current value of their common stock if its required r..

  Phones must be sold to achieve the breakeven point

U.S. Telephone Cellular sells phones for $100. The unit variable cost per phone is $50 plus a selling commission of 10% (based on the unit sales price per phone). Fixed manufacturing costs total $1,210 per month, while fixed selling and administrativ..

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd