Companies HD and LD Have the Same Total Assets,total Investor-Supplied

question 8

Multiple Choice

Companies HD and LD have the same total assets,total investor-supplied capital,operating income (EBIT) ,tax rate,and business risk.Company HD,however,has a much higher debt ratio than LD.Also,both companies' returns on investors' capital (ROIC) exceed their after-tax costs of debt,r_d(1 - T) .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 ROIC > r_d(1 - T),HD's stock price must exceed that of LD.
• E) Given that ROIC > r_d(1 - T),LD's stock price must exceed that of HD.

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Definitions:

Compounded Annually

A method of calculating interest where the interest earned each year is added to the principal, and in the next year, interest is earned on the new principal sum.

Lump Sum

A singular transaction carried out at a specific point in time, as opposed to a sequence of smaller installments.

Savings

Money set aside for future use, often accumulating interest in a financial institution.

Rate of Return

The profit or deficit generated from an investment over an indicated time frame, shown as a ratio of the investment's initial cost.