Question: Companies HD and LD have the same total assets, operating income (EBIT), tax rate, and business risk. Company HD, however, has a much higher debt

Companies HD and LD have the same total assets, operating income (EBIT), tax rate, and business risk. Company HD, however, has a much higher debt ratio than LD. Also HD's basic earning power (BEP) exceeds its cost of debt (rd).

Who can explain why answer C is correct, or why any other responses are incorrect?

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 BEP is greater than rd, HD's stock price must exceed that of LD.

E Given that BEP is greater than rd, LD's stock price must exceed that of HD

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