Two companies have identical assets and operating activities.Which of the follow statements is true?
A) Both companies have the same net income.
B) The company with more debt will have lower operating income due to interest expense.
C) The company with more debt will have higher operating income due to leverage.
D) The company with more debt will have lower net income due to interest expense.

Question

Quizplus · Accepted Answer

The company with more debt will have lower net income due to interest expense. Interest expense is a deductible expense, which reduces taxable income and ultimately net income. Therefore, the company with more debt will have a higher interest expense, resulting in lower net income.

Two Companies Have Identical Assets and Operating Activities