Which of the Following Statements Is CORRECT

question 89

Multiple Choice

Which of the following statements is CORRECT?

• A) Even though Firm A's current ratio exceeds that of Firm B, Firm B's quick ratio might exceed that of A. However, if A's quick ratio exceeds B's, then we can be certain that A's current ratio is also larger than B's.
• B) Suppose a firm wants to maintain a specific TIE ratio. It knows the amount of its debt, the interest rate on that debt, the applicable tax rate, and its operating costs. With this information, the firm can calculate the amount of sales required to achieve its target TIE ratio.
• C) Since the ROA measures the firm's effective utilization of assets without considering how these assets are financed, two firms with the same EBIT must have the same ROA.
• D) Suppose all firms follow similar financing policies, face similar risks, have equal access to capital, and operate in competitive product and capital markets. However, firms face different operating conditions because, for example, the grocery store industry is different from the airline industry. Under these conditions, firms with high profit margins will tend to have high asset turnover ratios, and firms with low profit margins will tend to have low turnover ratios.
• E) Klein Cosmetics has a profit margin of 5.0%, a total assets turnover ratio of 1.5 times, a zero debt ratio and therefore an equity multiplier of 1.0, and an ROE of 7.5%. The CFO recommends that the firm borrow money, use it to buy back stock, and raise the debt ratio to 50% and the equity multiplier to 2.0. She thinks that operations would not be affected, but interest on the new debt would lower the profit margin to 4.5%. This would probably not be a good move, as it would decrease the ROE from 7.5% to 6.5%.

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Definitions:

Sand Dunes

Hills or ridges of sand piled up by the wind found in deserts and on beaches.

Gravel

A loose aggregation of rock fragments, pebbles, and small stones, often used in construction and as a surface material for roads and driveways.

Uranium

A dense, metallic element used as fuel in nuclear reactors and as a component in nuclear weapons, known for its radioactive properties.

Regression

A process in statistics that determines the relationship between variables, or in geology, the retreat of the sea from the land.