Economics: Economics of Enterprise Economics of Enterprise Question #5966 from Lamarcus Streeter
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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