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Answer to Question #11933 in Economics of Enterprise for Tammy

Question #11933
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
Expert's answer
The CORRECT statement is E: Company HD has a lower times interest earned (TIE)
ratio. TIE ratio is a metric used to measure a company's ability to meet its
debt obligations. It usually indicates how many times a company can cover its
interest charges on a pretax basis. Company HD has a higher debt ratio and,
therefore, a higher interest expense. Failing to meet debt obligations could
force a company into bankruptcy.

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