Companies HD and LD have the same sales, tax rate, interest rate on their debt, total assets, and basic earning power. Both companies have positive net incomes. Company HD has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is correct?

Question

Quizplus · Accepted Answer

Company HD pays less in taxes because it has a higher interest expense, which reduces its taxable income, leading to lower taxes paid.

Companies HD and LD Have the Same Sales, Tax Rate