Companies Heidee and Leaudy are virtually identical in that they are both profitable, and they have the same total assets (TA), Sales (S), return on assets (ROA), and profit margin (PM).However, Company Heidee has the higher debt ratio.Which of the following statements is CORRECT?
A) Heidee has lower operating income (EBIT) than Leaudy.
B) Heidee has a lower total assets turnover ratio than Leaudy.
C) Heidee has a lower equity multiplier than Leaudy.
D) Heidee has a higher fixed assets turnover ratio than Leaudy.
E) Heidee has a higher ROE than Leaudy.

Question

Quizplus · Accepted Answer

Given that Heidee has a higher debt ratio, it implies a higher level of debt financing relative to equity. This leads to a higher equity multiplier (total assets/equity), which, assuming the same ROA for both companies, results in Heidee having a higher Return on Equity (ROE) due to the leverage effect. The other options are not directly influenced by the debt ratio in the context provided.

Companies Heidee and Leaudy Are Virtually Identical in That They