Heidee Corp. and Leaudy Corp. have identical assets, sales, interest rates paid on their debt, tax rates, and EBIT. However, Heidee uses more debt than Leaudy. Which of the following statements is CORRECT?
A) heidee would have the higher net income as shown on the income statement.
B) without more information, we cannot tell if heidee or leaudy would have a higher or lower net income.
C) heidee would have the lower equity multiplier for use in the dupont equation.
D) heidee would have to pay more in income taxes.
E) heidee would have the lower net income as shown on the income statement.

Question

Quizplus · Accepted Answer

More debt would mean more interest, hence a lower NI, given a constant EBIT, so e is correct. Also, we can rule out b and a, and Heidee would also have the higher multiplier, which rules out c. And with more interest, Heidee would have to pay less taxes, not more.