Companies Heidee and Leaudy have the same tax rate, sales, total assets, and basic earning power.Both companies have positive net incomes.Company Heidee has a higher debt ratio and, therefore, a higher interest expense.Which of the following statements is CORRECT?

Question

Quizplus · Accepted Answer

Heidee has higher interest charges.Basic earning power equals EBIT/Assets, and since assets are equal, EBIT must also be equal.TIE = EBIT/Interestrue.Therefore, Heidee higher interest charges means that its TIE must be lower.Thus, a is correctrue.All of the other statements are incorrectrue.

Companies Heidee and Leaudy Have the Same Tax Rate, Sales