Companies HD and LD have the same tax rates, sales, total assets, operating cost
ID: 2671645 • Letter: C
Question
Companies HD and LD have the same tax rates, sales, total assets, operating costs, and they pay the same interest rate on their debt. Company HD has a higher debt ratio. Which is correct?
a. Given the information, LD must have the higher ROE
b. Company LD has a higher basic earning power ratio (BEP)
c. Company HD has a higher basic earning power ratio.(BEP)
d. If the interest rate the companies pay on their debt is more than their basic earning power, then company HD will have the higher ROE.
e. If the interest rate the companies pay on their debt is less than their basic earning power, then company HD will have the higher ROE.
Explanation / Answer
d. If the interest rate the companies pay on their debt is more than their basic earning power, then company HD will have the higher ROE.
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