Firm A is very aggressive in its use of debt to leverage up its earnings for common stockholders,whereas Firm NA is not aggressive and uses no debt.The two firms' operations are identical⎯they have the same total investor-supplied capital,sales,operating costs,and EBIT.Thus,they differ only in their use of financial leverage (w_d).Based on the following data,how much higher or lower is A's ROE than that of NA,i.e.,what is ROE_A − ROE_NA? A)8.60% B)9.06% C)9.53% D)10.01% E)10.51%

Question

Quizplus · Accepted Answer

The Answer of Firm A is very aggressive in its use of debt to leverage up its earnings for common stockholders,whereas Firm NA is not aggressive and uses no debt.The two firms' operations are identical⎯they have the same total investor-supplied capital,sales,operating costs,and EBIT.Thus,they differ only in their use of financial leverage (w_d).Based on the following data,how much higher or lower is A's ROE than that of NA,i.e.,what is ROE_A − ROE_NA? A)8.60% B)9.06% C)9.53% D)10.01% E)10.51%

Firm a Is Very Aggressive in Its Use of Debt