2 growing companies are identical except that Company A capitalized significant marketing costs in year 1, whereas company B expense all marketing costs. For these 2 companies, which of the following statements about F/S effects is least likely correct? Company A will show: A. Lower income variability over time and equal total cash flows, compared to Comp. B B. Lower D/A and D/E ratios and lower investing cash flows than comp.B C. Lower ROE in year 1 and lower income variability over time than comp.B D. Higher operation cash flows and higher ROA in year 1 than comp.B My opinion: Actually, I feel that 4 answers is probably true b’cause: A: sure to be true B. sure to be true C. probably can happen (R increased but not in line with Equity Increase) D. for sure CFO will be higher. Besides that, the ROA also could be higher ( In case of that the growth rate of return is higher than growth rate of asset.) (I am not so confident to say that and still thinking). However, they asked about the answer is least likely correct. Can you help me to clarify it? Thanks.
It sounds like C to me. I think the higher net income would still give company A a higher ROE than company B even with the higher equity.
DTM86 Wrote: ------------------------------------------------------- > It sounds like C to me. I think the higher net > income would still give company A a higher ROE > than company B even with the higher equity. +1
C