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QUESTION:16[QUESTION BANK ID:12231]TYPE:MULTIPLE CHOICECORRECT
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?<< HIDE ANSWERSAThe two companies have the same times interest earned (TIE) ratio.BFirm L has a lower ROA than Firm U.CFirm L has a lower ROE than Firm U.DFirm L has the higher times interest earned (TIE) ratio.EFirm L has a higher EBIT than Firm U.QUESTION:17[QUESTION BANK ID:69670]TYPE:MULTIPLE CHOICECORRECTLePage Co. has an expected D1 of $1.375, its expected constant dividend growth rate is 6.0%, and its common stock currently sells for $22.50 per share. New stock can be sold to the public at the current price, but a flotation cost of 5% would be incurred. What would be the cost of equity from new common stock?<< HIDE ANSWERSQUESTION:18[QUESTION BANK ID:48938]TYPE:MULTIPLE CHOICE
CORRECTA commercial bank recognizes that its net income suffers whenever interest rates increase. Which of the following strategies would protect the bank against rising interest rates?<< HIDE ANSWERSQUESTION:19[QUESTION BANK ID:26316]TYPE:MULTIPLE CHOICECORRECTCompanies HD and LD have identical tax rates, total assets, and basic earning power ratios, and their basic earning power exceeds their before-tax cost of debt, rd. However, Company HD has a higher debt ratio and thus more interest expense than Company LD. Which of the following statements is CORRECT?<< HIDE ANSWERS