Companies HD and LD Have the Same Total Assets,sales,operating Costs,and

question 60

Multiple Choice

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

• A)Company LD has a higher basic earning power ratio (BEP) than Company HD.
• B)Company HD has a higher basic earning power ratio (BEP) than Company LD.
• C)If the interest rate the companies pay on their debt is more than their basic earning power (BEP), then Company HD will have the higher ROE.
• D)If the interest rate the companies pay on their debt is less than their basic earning power (BEP), then Company HD will have the higher ROE.

Recognize the importance of "clean hands" in seeking equitable relief.

Understand the characteristics and differences between various short-term financial instruments such as corporate paper, treasury bills, and commercial paper.

Grasp the mechanism by which interest rates are determined by the supply and demand for loanable funds.

Comprehend the factors that can cause shifts in the supply and demand for loanable funds and their impact on interest rates.

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Definitions:

Primacy Effect

The tendency to remember information at the beginning of a list better than information in the middle or at the end.

Halo Effect

A cognitive bias where an individual's overall impression of a person influences how they feel and think about that person's character.

Phi Phenomenon

A perceptual illusion in which stationary objects shown in rapid succession, such as lights flashing at certain speeds, appear to be moving.

Recency Effect

Recency effect is a memory phenomenon where individuals are more likely to recall the last items in a series better than those in the middle or the beginning.