Heidee Corp.and Leaudy Corp.have identical assets, sales, interest rates paid on their debt, tax rates, and EBIT.However, Heidee uses more debt than Leaudy.Which of the following statements is CORRECT?
A) Heidee would have higher net income as shown on the income statement than Leaudy.
B) Without more information, we cannot tell if Heidee or Leaudy would have a higher or lower net income.
C) Heidee would have a lower equity multiplier for use in the DuPont equation than Leaudy.
D) Heidee would have to pay more in income taxes than Leaudy.
E) Heidee would have lower net income as shown on the income statement than Leaudy.

Question

Quizplus · Accepted Answer

Since both companies have identical assets, sales, interest rates paid on their debt, tax rates, and EBIT, the only difference is the amount of debt used by each company. Heidee uses more debt, which means it has to pay higher interest expenses. This will result in lower net income for Heidee compared to Leaudy. Therefore, option E is correct.