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

Heidee uses more debt, which means it has higher interest expenses. This reduces its taxable income and net income compared to Leaudy, assuming all other factors are identical.