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

Question

Quizplus · Accepted Answer

Company HD has a higher debt ratio, which means it has more interest expense. This will lower its times-interest-earned (TIE) ratio compared to company LD. All other factors being equal, a higher TIE ratio is considered better as it indicates that the company has more earnings to cover its interest expense. Therefore, option D is the correct choice. Option A is incorrect because the equity multiplier is calculated as total assets divided by equity, and since both companies have the same total assets and sales, but HD has more debt, its equity multiplier will be higher than LD. Option B is incorrect because the question mentions that both companies have positive net incomes, but does not mention that HD has more net income. Option C is incorrect because the question states that both companies have the same tax rate, so they will pay the same amount in taxes.

Companies HD and LD Have the Same Tax Rate,sales,total Assets,and