Companies HD and LD have identical tax rates, total assets, and return on invested capital (ROIC), and their ROIC exceeds their after-tax cost of debt, (1-T) rd. However, Company HD has a higher debt ratio and thus more interest expense than Company LD. Which of the following statements is CORRECT?

Question

Companies HD and LD have identical tax rates, total assets, and return on invested capital (ROIC), and their ROIC exceeds their after-tax cost of debt, (1-T) rd. However, Company HD has a higher debt ratio and thus more interest expense than Company LD. Which of the following statements is CORRECT?

Quizplus · Accepted Answer

Since Company HD has a higher debt ratio and more interest expense, its net income will be lower, leading to a lower ROA compared to Company LD, assuming identical total assets.

Companies HD and LD Have Identical Tax Rates, Total Assets