Companies Heidee and Leaudy have the same total assets, sales, operating costs, and tax rates, and they pay the same interest rate on their debt. However, company Heidee has a higher debt ratio. Which of the following statements is CORRECT?
A) if the interest rate the companies pay on their debt is less than their basic earning power (bep), then company heidee will have the higher roe.
B) given this information, leaudy must have the higher roe.
C) company leaudy has a higher basic earning power ratio (bep).
D) company heidee has a higher basic earning power ratio (bep).
E) if the interest rate the companies pay on their debt is more than their basic earning power (bep), then company heidee will have the higher roe.

Question

Quizplus · Accepted Answer

The companies have the same EBIT and assets, hence the same BEP ratio. If the interest rate is less than the BEP, then using more debt will raise the ROE. Therefore, statement a is correct. The others are all incorrect.

Companies Heidee and Leaudy Have the Same Total Assets, Sales