Companies HD and LD Have Identical Tax Rates,total Assets,and Basic

question 13

Multiple Choice

Companies HD and LD have identical tax rates,total assets,and basic earning power ratios,and their basic earning power exceeds their before-tax cost of debt,r_d.However,Company HD has a higher debt ratio and thus more interest expense than Company LD.Which of the following statements is CORRECT?

• A) Company HD has a lower ROA than Company LD.
• B) Company HD has a lower ROE than Company LD.
• C) The two companies have the same ROA.
• D) The two companies have the same ROE.
• E) Company HD has a higher net income than Company LD.

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Definitions:

Dividend Payout

The portion of a company's earnings that is distributed to its shareholders as dividends.

Capital Gains

The profit earned from the sale of assets or investments that have increased in value over the time they were held.

Dividend Payout

The part of profits paid out to shareholders as dividends.

Earnings Per Share

The portion of a company's profit allocated to each outstanding share of common stock, indicating the company's profitability on a per-share basis.