Company AA and Company BB have identical Assets, Revenues and Ebit. They are in the...
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Company AA and Company BB have identical Assets, Revenues and Ebit. They are in the same line of business. Company AA has a Debt/Capital ratio of 0, while Company BB's ratio is 75%. Company BB pays a low interest rate, and both company's pay the same income tax rate. During good, profitable years, which company probably has the highest ROE and why? Choose a company and one reason.
Because of its operating leverage.
Because of its larger Equity, its low interest rate and the tax shield effect.
Company AA.
Company BB.
Because it has higher operating cash flow.
Because of its reduced Equity, its low interest rate and the tax shield effect.
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