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 total assets turnover than Company LD.
B)Company HD has a lower equity multiplier than Company LD.
C)Company HD has a higher fixed assets turnover than Company LD.
D)Company HD has a higher ROE than Company LD.

Question

Quizplus · Accepted Answer

Since both companies have the same ROA and PM, the only way for HD to have a higher ROE is by having a higher leverage (debt ratio). This is because ROE can be decomposed into ROA and equity multiplier (EM), where EM = TA/Equity. Given that TA is the same for both companies, HD must therefore have a lower EM, meaning that it has more debt relative to equity. This higher leverage amplifies the return on equity, resulting in a higher ROE for HD compared to LD. None of the other options presented necessarily follow from the information provided.

Companies HD and LD Are Both Profitable,and They Have the Same