Question

Companies A and B have the same total assets, sales, operating costs, and tax rates, and they pay the same interest rate on their debt. However, company A has a higher debt ratio. Which of the following statements is INCORRECT? a. Both companies have the same BEP ratio. b. Given this information, Company B must have the higher ROE. c. Given this information, Company A must have the higher ROE.

Answer 1

c. Given this information, Company A must have the higher ROE.

Step-by-step explanation:

ROE = Net income/Total assets. Interest expense is higher for Company A, hence its net income is lower than Company B's. Therefore, ROE of A < ROE of B