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.

Question

Quizplus · Accepted Answer

Firm L has a lower ROA than Firm U because ROA is calculated as net income divided by total assets, and Firm L has interest expenses that reduce its net income compared to Firm U, which has no debt.

Firms U and L Both Have a Return on Invested