Question

Companies Heidee and Leaudy have the same total assets, sales, operating costs, and tax rates, and they pay the same interest rate on their debt. However, company Heidee has a higher debt ratio. Which of the following statements is correct?A. If the interest rate the companies pay on their debt is less than their basic earning power (BEP), then Company Heidee will have the higher ROE.
B. Given this information, Leaudy must have the higher ROE.
C. Company Leaudy has a higher basic earning power ratio (BEP).
D. Company Heidee has a higher basic earning power ratio (BEP).
E. If the interest rate the companies pay on their debt is more than their basic earning power (BEP), then Company Heidee will have the higher ROE.

Answer 1

Answer:

E. If the interest rate the companies pay on their debt is more than their basic earning power (BEP), then Company Heidee will have the higher ROE.

Explanation:

Base on the scenario been described in the question, we saw that between the two companies, Heidee and Leaudy, they both have the same total assets, sales, operating costs, and tax rates, and they pay the same interest rate on their debt but company Heidee has a higher debt ratio, this will make company Heidee has a higher ROE because of its higher ratio of debt