Question

Heidee Corp. and Leaudy Corp. have identical assets, sales, interest rates paid on their debt, tax rates, and EBIT. However, Heidee uses more debt than Leaudy. Which of the following statements is CORRECT?
A) Heidee would have the higher net income as shown on the income statement.
B) Without more information, we cannot tell if Heidee or Leaudy would have a higher or lower net income.
C) Heidee would have the lower equity multiplier for use in the Du Pont equation.
D) Heidee would have to pay more in income taxes.
E) Heidee would have the lower net income as shown on the income statement.

Answer 1

Answer:

E) Heidee would have the lower net income as shown on the income statement.

Explanation:

Heidee and Leaudy have the same Earning Before Interest and Taxes (EBIT).

They both also have the same interest rate paid on debt.

So if Heidee uses more of their debt than Leaudy it means they will incur more interest payment on debt.

This will result in less income for the company.

On the other hand Leaudy uses less debt so their interest expense is low and income is higher.

Heidee would have the lower net income as shown on the income statement.