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c. 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.
d. The two companies have the same ROE.
e. Company HD’s ROE would be higher if it had no debt.
5. Which of the following statements is CORRECT?
a. Generally, debt-to-total-assets ratios do not vary much among
different industries, although they do vary among firms within a given
industry.
b. Electric utilities generally have very high common equity ratios
because their revenues are more volatile than those of firms in most
other industries.
c. Drug companies (prescription, not illegal!) generally have high debt-
to-equity ratios because their earnings are very stable and, thus, they can
cover the high interest costs associated with high debt levels.