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.

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Definitions:

Tax Revenue

Income that is gained by governments through taxation, which is then used to fund public services and government commitments.

Government Benefit

A form of financial or in-kind assistance provided by the government to individuals, groups, or organizations.

Tax Revenue

The income collected by governments through the imposition of taxes on goods, income, and activities.

Red Cars

Vehicles painted in a red hue, often associated with speed, attractiveness, or higher insurance rates due to perceived risk.