Firms u and l each have the same amount of assets, investor-supplied capital, and both have a return on investors' capital (roic) of 12%. 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 8%. both firms have positive net income and a 35% tax rate. which of the following statements is correct? a. firm l has a lower roe than firm u. b. the two companies have the same times interest earned (tie) ratio. c. firm l has a lower roa than firm u. d. firm l has the higher times interest earned (tie) ratio. e. firm l has a higher ebit than firm u.

The correct option is a.

Explanation:

In the question, it is given that there are two firms namely U and L who has same same amounts of assets, investor supplied material, and Return on investor capital.

The Firm U is unleveraged which has 100% equity

whereas,  Firm L is leveraged firm which has 50% debt and 50% equity

As we have to compare these two firms based on return on equity.

So, based on ROE, Firm U has 100% equity so it have more equity

And, the Firm L have 50% equity which means the firm has low equity as 50% contribution is gone to the debt.

The rest information which is given in the question is irrelevant. So, it is ignored.

Thus, the Firm L has a lower ROE than Firm U

Hence, the correct option is a.