Companies HD and LD Have Identical Amounts of Assets,investor-Supplied Capital,operating

question 16

Multiple Choice

Companies HD and LD have identical amounts of assets,investor-supplied capital,operating income (EBIT) ,tax rates,and business risk.Company HD,however,has a higher debt ratio than LD.Company HD's return on investors' capital (ROIC) exceeds its after-tax cost of debt,r_d(1 - T) .Which of the following statements is CORRECT?

• A) Company HD has a higher return on assets (ROA)than Company LD.
• B) Company HD has a higher times interest earned (TIE)ratio than Company LD.
• C) 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.
• D) The two companies have the same ROE.
• E) Company HD's ROE would be higher if it had no debt.

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Definitions:

Average Variable Cost

The total variable costs divided by the quantity of output, indicating the variable cost per unit of output.

Marginal Cost

The hike in production costs when an additional unit of a good or service is manufactured.

Market Price

The existing selling or buying price for a service or asset in a particular trading environment.

Economic Profit

The total revenue of a business minus its total costs, including both explicit and implicit costs.