Companies HD and LD have identical tax rates, total assets, total investor-supplied capital, and returns on investors' capital (ROIC), and their ROICs exceed their after-tax costs of debt, rd(1 - T). However, Company HD has a higher debt ratio and thus more interest expense than Company LD. Which of the following statements is CORRECT?
A) Company HD has a higher net income than Company LD.
B) Company HD has a lower ROA than Company LD.
C) Company HD has a lower ROE than Company LD.
D) The two companies have the same ROA.
E) The two companies have the same ROE.

Question

Quizplus · Accepted Answer

Company HD has a higher interest expense due to its higher debt ratio, which reduces its net income, leading to a lower ROA compared to Company LD.

Companies HD and LD Have Identical Tax Rates, Total Assets