Two Companies, a and B, Both Have $1 Million in Assets

Two companies, A and B, both have $1 million in assets, earnings before interest and taxes (EBIT) of $160,000, and the same tax rate. Company A is all equity financed, and Company B is 50% debt financed and 50% equity financed. If Company B's pretax cost of debt is 8%, then Company A will have a ROA that is _____ and a ROE that is _____ than Company B's. $$\begin{array} { l c c } & \underline { \text { ROA } } & \underline { \text { ROE } } \\\text { A) } & \text { lower } & \text { higher } \\\text { B) } & \text { higher } & \text { higher } \\\text { C) } & \text { lower } & \text { lower } \\\text { D) } & \text { higher } & \text { lower }\end{array}$$

A) Option A
B) Option B
C) Option C
D) Option D

Correct Answer:

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