The total capital invested in Firm A is ₹500 Crore, including 40% of borrowed funds. The total capital invested in Firm B is ₹500 Crore, including 20% of borrowed funds. There are no preference shares in both the firms.

CS Executive · Financial and Strategic Management · PYQS · December 2022
The total capital invested in Firm A is ₹500 Crore, including 40% of borrowed funds. The total capital invested in Firm B is ₹500 Crore, including 20% of borrowed funds. There are no preference shares in both the firms. If the rate of operating earnings (EBIT) for both the firms is 18%, applicable income tax rate is 30% and rate of interest is 12% p.a., which of the follwing statements is true in the light of this information ? (A) Return on Equity of firm A will be higher as compared to that of firm B (B) Return on Equity of firm B will be higher as compared to that of firm A (C) Both the firms are indifferent in terms of rate of return on equity (D) None of the above
(A) Return on Equity of firm A will be higher as compared to that of firm B
(B) Return on Equity of firm B will be higher as compared to that of firm A
(C) Both the firms are indifferent in terms of rate of return on equity
(D) None of the above

Answer & Explanation:

Correct Answer: Option (A)

Official answer key: (A).

Topics: Financial Management

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