Companies HD and LD have identical amounts of assets, operating income Which of the following statements is CORRECT?
A)Company HD has a higher return on assets (ROA) than Company LD.
B)Company HD has a higher times interest earned (TIE) ratio than Company LD.
C)Company HD has a higher return on equity (ROE) than Company LD, and its risk, as measured by the standard deviation of ROE, is also higher than LD's.
D)The two companies have the same ROE.
E)Company HD's ROE would be higher if it had no debt.

Question

Quizplus · Accepted Answer

Company HD has a higher ROE than Company LD because it uses more debt, which increases financial leverage. This also increases the risk, as measured by the standard deviation of ROE.

Companies HD and LD Have Identical Amounts of Assets, Operating