Operationally Similar Companies, HD and LD, Have Identical Amounts of Assets

question 41

Multiple Choice

operationally similar companies, HD and LD, have identical amounts of assets, operating income (EBIT) , tax rates, and business risk Company HD, however, has a much higher debt ratio than LD Company HD's basic earning power ratio (BEP) exceeds its cost of debt (rd) Which of the following statements is CORRECT?

• A) Company HD has a higher times interest earned (TIE) ratio than Company LD.
• B) Company HD has a higher return on equity (ROE) than Company LD, and its risk, as measured by the standard deviation of ROE, is also higher than LD's.
• C) The two companies have the same ROE.
• D) Company HD's ROE would be higher if it had no debt.
• E) Company HD has a higher return on assets (ROA) than Company LD.

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