Q 59

Companies HD and LD have the same total assets,total investor-supplied capital,operating income (EBIT),tax rate,and business risk.Company HD,however,has a much higher debt ratio than LD.Also,both companies' returns on investors' capital (ROIC)exceed their after-tax costs of debt,rd(1 - T).Which of the following statements is CORRECT? A) HD should have a higher return on assets (ROA)than LD. B) HD should have a higher times interest earned (TIE)ratio than LD. C) HD should have a higher return on equity (ROE)than LD,but its risk,as measured by the standard deviation of ROE,should also be higher than LD's. D) Given that ROIC > rd(1 - T),HD's stock price must exceed that of LD. E) Given that ROIC > rd(1 - T),LD's stock price must exceed that of HD.

Multiple Choice