HD Corp and LD Corp have identical assets,sales,interest rates paid on their debt,tax rates,and EBIT.Both firms finance using only debt and common equity,and total assets equal total invested capital.However,HD uses more debt than LD.Which of the following statements is CORRECT?
A) Without more information,we cannot tell if HD or LD would have a higher or lower net income.
B) HD would have the lower equity multiplier for use in the DuPont equation.
C) HD would have to pay more in income taxes.
D) HD would have the lower net income as shown on the income statement.
E) HD would have the higher operating margin.

Question

Quizplus · Accepted Answer

?More debt would mean more interest,hence a lower NI,given a constant EBIT,so d is correct.Also,we can rule out a and e,and HD would also have the higher multiplier,which rules out b.And with more interest,HD would have to pay less taxes,not more.

HD Corp and LD Corp Have Identical Assets,sales,interest Rates Paid