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

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

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

Correct Answer:

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