GAMA Corp. and FAMA Corp. have the same tax rate, sales, total assets, and basic earning power. Both companies have positive net incomes. GAMA Corp. has a higher debt to asset ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT? a.GAMA Corp. has a lower times interest earned (TIE) ratio. b.GAMA Corp.has more net income. c.GAMA Corp.pays more in taxes. d.GAMA Corp. has a lower ROE.
GAMA Corp. and FAMA Corp. have the same tax rate, sales, total assets, and basic earning power. Both companies have positive net incomes. GAMA Corp. has a higher debt to asset ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?
a.GAMA Corp. has a lower times interest earned (TIE) ratio.
b.GAMA Corp.has more net income.
c.GAMA Corp.pays more in taxes.
d.GAMA Corp. has a lower
Please explain.
1. Gama Corp. and Fama Corp. has same Sales, same tax rate, same total assets and same basic earnings power
2. Basic earnings Power = Earnings before interest and tax (EBIT) / Total asset (It means the both companies have same EBIT as well)
3. Times Interest Earned Ratio = EBIT / Interest Expense
4. ROE = Net Income / Equity
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
