Question

Companies HD and LD are both profitable, and they have the same total assets (TA), total invested capital, sales (S), return on assets (ROA), and profit margin (PM). Both firms finance using only debt and common equity. However, Company HD has the higher total debt to total capital ratio. Which of the following statements is CORRECT?
A) Company HD has a higher assets turnover than company LDB) Company HD has a higher return on equity than company LDC) None of the other statements are correct because the information provided on the question is not enoughD) Company HD has lower total assets turnover than company LDE) Company HD has a lower operating income (EBIT) than company LD

Answer 1

Answer:

Companies HD and LD

Since Company HD has the higher total debt to total capital ratio, the statement that is CORRECT is:

B) Company HD has a higher return on equity than company LD.

Explanation:

Return on Equity (ROE) is a financial measure of how well a company's management deploys shareholders' capital.  A higher ROE can be a result of high financial leverage, meaning that more debt than equity is being used to generate the returns.  Note that too much leverage poses solvency risks.