CompCompanies Heidee and Leaudy have the same sales, tax rate, interest rate on
ID: 2652067 • Letter: C
Question
CompCompanies Heidee and Leaudy have the same sales, tax rate, interest rate on their debt, total assets, and basic earning power. Both companies have positive net incomes. Company Heidee has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?
a.
Company Heidee has more net income.
b.
Company Heidee pays less in taxes.
c.
Company Heidee has a lower equity multiplier.
d.
Company Heidee has a higher ROA.
e.
Company Heidee has a higher times interest earned (TIE) ratio.
a.
Company Heidee has more net income.
b.
Company Heidee pays less in taxes.
c.
Company Heidee has a lower equity multiplier.
d.
Company Heidee has a higher ROA.
e.
Company Heidee has a higher times interest earned (TIE) ratio.
Explanation / Answer
The correct answer is
b.
Company Heidee pays less in taxes.
AS the interest is tax deductible expense, so as the interest expense will increase the net income will decrease resulting in decrease in taxes to be paid.
b.
Company Heidee pays less in taxes.
AS the interest is tax deductible expense, so as the interest expense will increase the net income will decrease resulting in decrease in taxes to be paid.
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