Question

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.

Answer 1

Answer: e. Company HD has a lower times interest earned (TIE) ratio.

Step-by-step explanation:

Answer 2

e. Company HD has a lower times interest earned (TIE) ratio.

Step-by-step explanation:

We know that both companies have the same EBIT, because both have the same Basic Earning Power, which is calculated by dividing EBIT by Total Assets.

Then if company HD has a higher debt ratio and higher interest expenses, it means that the Times Interest Ratio in HD company it's lower than LD company, the Times Interest Ratio , it's calculated by dividing EBIT/Interest Expenses, at the same EBIT, but higher interest expenses on HD company, it means a lower Times Interest Ratio to this company.