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Answer on Economics of Enterprise Question for LaMarcus Streeter

Question #6764

4. Companies HD and LD have identical amounts of assets, operating income (EBIT), tax rates, and business risk. Company HD, however, has a much higher debt ratio than LD. Company HD’s basic earning power ratio (BEP) exceeds its cost of debt (rd). Which of the following statements is CORRECT?

a. Company HD has a higher return on assets (ROA) than Company LD.
b. Company HD has a higher times interest earned (TIE) ratio than Company LD.
c. Company HD has a higher return on equity (ROE) than Company LD, and its risk, as measured by the standard deviation of ROE, is also higher than LD’s.
d. The two companies have the same ROE.
e. Company HD’s ROE would be higher if it had no debt.

Expert's answer

e. Company HD's ROE would be higher if it had no debt.
Because the debt of
HD is higher, so its ROE is smaller.

Comments

2013-03-13 00:10:40

This is wrong. More debt will equal a HIGHER ROE

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