Operating income-tax rates and business risk

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Reference no: EM131603126

Two operationally similar companies, Heavy and Light, have identical amounts of assets, operating income (EBIT), tax rates, and business risk. Heavy, however, has a much higher debt ratio than Light. Heavy’s basic earning power ratio (BEP) exceeds its cost of debt (rd). Which of the following statements is CORRECT? a. Heavy has a higher times interest earned (TIE) ratio than Light. b. Heavy has a higher return on equity (ROE) than Light, and its risk, as measured by the standard deviation of ROE, is also higher than Light's. c. The two companies have the same ROE. d. Heavy's ROE would be higher if it had no debt. e. Heavy has a higher return on assets (ROA) than Light.

Reference no: EM131603126

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