Companies HD and LD have identical tax rates, total assets, and basic earning power ratios, and their basic earning power exceeds their before-tax cost of debt, rd. However, Company HD has a higher debt ratio and thus more interest expense than Company LD. Which of the following statements is CORRECT?
A) Company HD has a higher net income than Company LD.
B) Company HD has a lower ROA than Company LD.
C) Company HD has a lower ROE than Company LD.
D) The two companies have the same ROA.
E) The two companies have the same ROE.

Question

Quizplus · Accepted Answer

Company HD has a higher debt ratio, leading to more interest expense, which reduces net income and thus results in a lower ROA compared to Company LD.

Companies HD and LD Have Identical Tax Rates, Total Assets