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.

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Definitions:

Doggerel

A term unrelated to economics, referring to irregularly or poorly constructed verse, often of a humorous or trivial nature.

Paasche Price Index

An economic indicator that measures the change over time in the cost of a fixed basket of consumer goods and services, using the current period as the base.

Doggerel

Verse or words that are poorly written or expressed, often characterized by clichés, sloppy meter, and a lack of seriousness or artistic depth.

Revealed Preference

A theory in economics that assumes individuals' preferences can be discerned by observing their purchasing habits and behaviors.