*please give brief explanation as well* HCo and LCo are identical except that HC
ID: 2374168 • Letter: #
Question
*please give brief explanation as well*
HCo and LCo are identical except that HCo has a higher debt-equity ratio than LCo. Which one of the following best describes the relative ranking of their ROE? HCo's ROE will always be higher than LCo's ROE. HCo's ROE will always be equal to LCo's ROE. HCo's ROE will always be less than LCo's ROE. In good times (ROA exceeds the interest rate), HCo's ROE will exceed LCo's ROE. In bad times (ROA falls short of the interest rate), HCo's ROE will be less than LCo's ROE. In good times (ROA exceeds the interest rate), HCo's ROE will be less than LCo's ROE. In bad times (ROA falls short of the interest rate), HCo's ROE will exceed LCo's ROE.Explanation / Answer
OK. It is (d.)
ROE = ROA x Debt-Equity Management Ratio
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