Two companies, A and B, both have $1 million in assets, earnings before interest and taxes (EBIT) of

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.

A.

Option A

B.

Option B

C.

Option C

D.

Option D

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