Companies HD and LD are both profitable,and they have the same total assets (TA),total invested capital,sales (S),return on assets (ROA),and profit margin (PM).Both firms finance using only debt and common equity.However,Company HD has the higher total debt to total capital 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.
E) Company HD has a lower operating income (EBIT)than Company LD.

Question

Quizplus · Accepted Answer

Rule out all answers except d because they are false.Alternative answer using the DuPont equation:
ROE = PM × TATO × Eq multiplier
ROE = NI/S × S/TA × TA/Equity
The first two terms are the same,but HD has a higher equity multiplier due to its higher debt,hence higher ROE.

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