Companies HD and LD Have the Same Total Assets, Operating

question 30

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 HD's basic earning power (BEP) exceeds its 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:

Policy Recommendation

A proposal provided by experts or analysts on specific ways to address a particular issue or to improve a situation.

Homeless People

Homeless people are individuals who lack a fixed, regular, and adequate nighttime residence, including those living on the streets, shelters, or in unstable housing situations.

Efficient Economy

An economic system where resources are allocated optimally to meet the needs and wants of its participants, minimizing waste.

Consumer Demand

The desire of purchasers, consumers, or buyers for products or services which they are willing and able to buy.