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?

Question

Quizplus · Accepted Answer

Company B, being financed entirely with equity, will not benefit from the tax shield that debt provides. Therefore, if both companies have the same basic earning power, Company B will have a higher return on assets because Company A's interest expenses will reduce its net income.

Company a Is Financed with 90 Percent Debt, Whereas Company