CorpAnd LD Corp

question 101

Multiple Choice

Corp.and LD Corp.have identical assets, sales, interest rates paid on their debt, tax rates, and EBIT.However, HD uses more debt than LD.Which of the following statements is CORRECT?

• A)Without more information, we cannot tell if HD or LD would have a higher or lower net income.
• B)HD would have the lower equity multiplier for use in the Du Pont equation.
• C)HD would have to pay more in income taxes.
• D)HD would have the lower net income as shown on the income statement.
• E)HD would have the higher net income as shown on the income statement.

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Definitions:

Operating Leverage

A measure of how sensitive a company's operating income is to changes in revenue, indicating the degree to which fixed costs affect profitability.

Sales Revenue

The total amount of money received by a company from its sales of goods or services before any expenses are subtracted.

DOL

Stands for Degree of Operating Leverage, which measures a company’s sensitivity of operating income to its sales.

EBIT

Earnings Before Interest and Taxes represent a company's profit before deducting expenses from interest and income taxes.