Companies HD and LD have the same total assets, operating income Which of the following statements is CORRECT?
A)HD should have a higher return on assets (ROA) than LD.
B)HD should have a higher times interest earned (TIE) ratio than LD.
C)HD should have a higher return on equity (ROE) than LD, but its risk, as measured by the standard deviation of ROE, should also be higher than LD's.
D)Given that BEP rd, HD's stock price must exceed that of LD.
E)Given that BEP rd, LD's stock price must exceed that of HD.

Question

Companies HD and LD have the same total assets, operating income Which of the following statements is CORRECT?
A)HD should have a higher return on assets (ROA) than LD.
B)HD should have a higher times interest earned (TIE) ratio than LD.
C)HD should have a higher return on equity (ROE) than LD, but its risk, as measured by the standard deviation of ROE, should also be higher than LD's.
D)Given that BEP > rd, HD's stock price must exceed that of LD.
E)Given that BEP > rd, LD's stock price must exceed that of HD.

Quizplus · Accepted Answer

HD is likely to have higher financial leverage, which increases ROE but also increases the risk, as measured by the standard deviation of ROE.

Companies HD and LD Have the Same Total Assets, Operating