Companies HD and LD Have Identical Amounts of Assets, Investor-Supplied

question 44

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, rd(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:

Genetic Makeup

The set of genes or genetic information that an individual inherits from their parents, which contributes to their physical and psychological traits.

Shared Environment

Aspects of the environment that individuals living together share, affecting their development and traits in a similar manner.

Environmental Factors

Elements outside the individual, such as social, cultural, and physical environments, that can influence one's behavior and development.

Personality Traits

Enduring patterns of thought, feeling, and behavior that characterize an individual and differentiate them from others.