Companies HD and LD have the same tax rate,sales,total assets,and basic earning power.Both companies have positive net incomes.Both firms finance using only debt and common equity,and total assets equal total invested capital.Company HD has a higher total debt to total capital ratio and therefore a higher interest expense.Which of the following statements is CORRECT?

Question

Quizplus · Accepted Answer

HD has higher interest charges.Basic earning power equals EBIT/Assets,and since assets and BEP are equal,EBIT must also be equal.TIE = EBIT/Interest.Therefore,HD's higher interest charges means that its TIE must be lower.Thus,e is correct.All of the other statements are incorrect.

Companies HD and LD Have the Same Tax Rate,sales,total Assets,and