Companies HD and LD have the same tax rate, sales, 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 has a higher debt ratio and therefore a higher interest expense, leading to a lower TIE ratio. All other variables are held constant between the two companies, so options A and B are incorrect. The tax rate is the same for both companies, so option C is also incorrect.

Companies HD and LD Have the Same Tax Rate, Sales