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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.1. Which of the following statements is CORRECT?a. Firm L has a lower ROA than Firm U. b. Firm L has the higher times interest earned (TIE) ratio. c. Firm L has a lower ROE than Firm U. d. The two companies have the same times interest earned (TIE) ratio. e. Firm L has a higher EBIT than Firm U.

Respuesta :

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Answer:

Firm L has a lower ROA than firm U - Option A is the best answer choice

Explanation:

Knowing that,

Return on Asset, ROA = Net income / total asset

The Net income  of leveraged firm  L will be lower due to interest expense , it will yield a lowerReturn on Asset than the unlevered firm U

Therefore, the Return on Asset, ROA of Firm L will be lower  than the Return on Asset, ROA of firm U - Option A

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