Companies HD and LD Have the Same Total Assets, Operating

question 16

Multiple Choice

Companies HD and LD have the same total assets, operating income (EBIT) , tax rate, and business risk. Company HD, however, has a much higher debt ratio than LD. Also, both companies' basic earning power (BEP) ratios exceed their cost of debt (rd) . Which of the following statements is CORRECT?

• A) HD should have a higher return on assets (ROA) than LD.
• B) HD should have a higher times interest earned (TIE) ratio than LD.
• C) HD should have a higher return on equity (ROE) than LD, but its risk, as measured by the standard deviation of ROE, should also be higher than LD's.
• D) Given that BEP > rd, HD's stock price must exceed that of LD.
• E) Given that BEP > rd, LD's stock price must exceed that of HD.

---

Definitions:

Percent Change

A mathematical calculation that describes the degree of change over time, expressed as a percentage.

Demand Curve

A graphical representation of the relationship between the price of a good and the quantity demanded for a given period.

Price Ceiling

a legally established maximum price for goods or services, aimed at keeping prices from rising to high levels.

Equilibrium

A condition in markets where supply equals demand, and there is no external pressure for change.