Firm a Is Very Aggressive in Its Use of Debt

Multiple Choice

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 (wd) . Based on the following data, how much higher or lower is A's ROE than that of NA, i.e., what is ROEA ? ROENA? $\begin{array}{c}\begin{array}{lr}\underline{\text { Applicable to Both Firms }}\\ \text { Capital } \quad \$ 150,000 \\\text { EBIT } \quad \$40,000 \\\text { Tax rate } \quad 35 \%\end{array}\begin{array}{lll}\underline{\text { Firm A's Data }}\\ \mathrm{w}_{\mathrm{d}} \quad\quad\quad\quad 50 \% \\\text { Int. rate } \quad 12 \% \\\\\end{array}\begin{array}{lll}\underline{\text { Firm NA's Data }} \\\mathrm{w}_{\mathrm{d}} \quad\quad\quad\quad 0 \% \\\text { Int. rate } \quad 10 \%\\ \\\end{array}\end{array}$

A) 8.60%
B) 9.06%
C) 9.53%
D) 10.01%
E) 10.51%