Company A and Company B have the same total assets, Return on Assets (ROA), and

Question

Company A and Company B have the same total assets, Return on Assets (ROA), and profit margin. However, Company A has higher debt ratio and interest expense than Company B. Which of the following statements is most correct?

a. Company A has a higher ROE than Company B. b. Company A has a lower operating income (EBIT) than Company B. c. Company A has a lower net income than Company B. d. Company A has a lower equity multiplier (EM) than Company B. e. Company A has a lower total assets turnover than Company B.

Explanation / Answer

Answer is Option A i.e. Company A has a higher ROE than the Company B. & Option C i.e. Company A has a lower net income than the Company B.

ROE- Company A will have higher ROE, as the Company A will have lesser equity as compared to Company B.

NEt Income- As the Company has the Higher debt Ratio and the Interest Expenses are greater than the Company B, It will reduce the EBIT with higher amount due to Interest expenses resulting in decreasing the Net Income.

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