Companies Heidee and Leaudy are virtually identical in that they are both profitable,and they have the same total assets (TA),Sales (S),return on assets (ROA),and profit margin (PM).However,Company Heidee has the higher debt ratio.Which of the following statements is CORRECT?
A) Company Heidee has a lower operating income (EBIT)than Company LD.
B) Company Heidee has a lower total assets turnover than Company Leaudy.
C) Company Heidee has a lower equity multiplier than Company Leaudy.
D) Company Heidee has a higher fixed assets turnover than Company Leaudy.
E) Company Heidee has a higher ROE than Company Leaudy.

Question

Quizplus · Accepted Answer

Since Company Heidee has a higher debt ratio, it uses more debt financing, which increases its financial leverage. Given that both companies have the same ROA, the higher leverage would result in a higher return on equity (ROE) for Company Heidee.

Companies Heidee and Leaudy Are Virtually Identical in That They