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Answer on Economics of Enterprise Question for Lamarcus Streeter

Question #5966

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?
a. Company HD has a lower equity multiplier.
b. Company HD has more net income.
c. Company HD pays more in taxes.
d. Company HD has a lower ROE.
e. Company HD has a lower times interest earned (TIE) ratio.

Give explanation for answer given.

Expert's answer

e. Company HD has a lower times interest earned (TIE) ratio.
Because Times interest earned (TIE) or interest coverage ratio is a measure of a company's ability to honor its debt payments. And HD has a higher debt ratio and, therefore, a higher interest expense.

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