Companies HD and LD Have the Same Total Assets, Total

Multiple Choice

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.