Companies HD and LD are both profitable, and they have the same total assets (TA

Question

Companies HD and LD are both profitable, and they have the same total assets (TA), Sales (S), return on assets (ROA), and profit margin (PM). However, Company HD has the higher debt ratio. Which of the following statements is CORRECT?

A. Company HD has a lower equity multiplier than Company LD

B. Company HD has a higher ROE than Company LD

C. Company HD has a lower operating income (EBIT) than Company LD.

D. Company HD has a lower total assets turnover than Company LD.

E. Company HD has a higher fixed assets turnover than Company B.

Explanation / Answer

Interest is the only return to debt. All earnings after taxes will belong to equity shareholders only. So usually they will make higher returns than debt providers. For many companies return on equity will be higher than return on debt because of this reason only.

Hence, correct option is (B)

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