Question
HD Corp. and LL Inc. have the same total assets, sales, operating costs, and tax rates, and they pay the same interest rate on their
HD Corp. and LL Inc. have the same total assets, sales, operating costs, and tax rates, and they pay the same interest rate on their debt. However, company HD has a higher debt ratio. Which of the following statements is CORRECT?
a) If the interest rate the companies pay on their debt is more than their basic earning power (BEP), then HD Corp. will have the higher ROE.
b) Given this information, LL Inc. must have the higher ROE.
c) If the interest rate the companies pay on their debt is less than their basic earning power (BEP), then HD Corp. will have the higher ROE.
d) LL Inc. has a higher basic earning power ratio (BEP).
e) HD Corp. has a higher basic earning power ratio (BEP).
Step by Step Solution
There are 3 Steps involved in it
Step: 1
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-text-image.webp)
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Step: 3
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started