An analyst has obtained the following information regarding two companies, Company X and Company Y: • Company X and Company Y have the same total assets.
• Company X has a higher interest expense than Company Y.
• Company X has a lower operating income (EBIT)• Company X and Company Y have the same return on equity (ROE)• Company X and Company Y have the same total assets turnover (TATO)• Company X and Company Y have the same tax rate.
Based on this information, which of the following statements is most correct?
A) Company X has a higher times-interest-earned (TIE) ratio.
B) Company X and Company Y have the same debt ratio.
C) Company X has a higher return on assets (ROA).
D) Company X has a lower profit margin.
E) Company X has a higher basic earning power (BEP) ratio.

Question

Quizplus · Accepted Answer

Company X has a lower operating income and higher interest expense, leading to a lower profit margin compared to Company Y, given that both have the same ROE and TATO.

An Analyst Has Obtained the Following Information Regarding Two Companies