Two Operationally Similar Companies, HD and LD, Have Identical Amounts

Two operationally similar companies, HD and LD, have identical amounts of assets, operating income (EBIT) , tax rates, and business risk. Company HD, however, has a much higher debt ratio than LD. Company HD's return on invested capital (ROIC) exceeds its after-tax cost of debt, (1-T)  rd. Which of the following statements is CORRECT?

A) company hd has a higher times interest earned (tie) ratio than company ld.
B) company hd has a higher return on equity (roe) than company ld, and its risk, as measured by the standard deviation of roe, is also higher than ld's.
C) the two companies have the same roe.
D) company hd's roe would be higher if it had no debt.
E) company hd has a higher return on assets (roa) than company ld.

Correct Answer:

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