Companies Heidee and Leaudy Have the Same Total Assets, Sales

question 12

Multiple Choice

Companies Heidee and Leaudy have the same total assets, sales, operating costs, and tax rates, and they pay the same interest rate on their debt.However, company Heidee has a higher debt ratio.Which of the following statements is CORRECT?

• A) If the interest rate the companies pay on their debt is less than their basic earning power (BEP), then Company Heidee will have the higher ROE.
• B) Given this information, Leaudy must have the higher ROE.
• C) Company Leaudy has a higher basic earning power ratio (BEP).
• D) Company Heidee has a higher basic earning power ratio (BEP).
• E) If the interest rate the companies pay on their debt is more than their basic earning power (BEP), then Company Heidee will have the higher ROE.

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Definitions:

Price Floor

A government-imposed limit on how low a price can be charged for a product, aimed to ensure fair conditions for producers.

Temporary Surplus

A situation where the supply of a product exceeds demand for a short period, often leading to price reductions.

Permanent Surplus

A situation in which the supply of a particular good or service persistently exceeds demand, often leading to long-term price declines.

Price Support Payments

are subsidies or financial assistance provided by the government to farmers or producers to maintain the market price of an agricultural product above its market equilibrium.