Which of the Following Statements Is Most Correct

question 93

Multiple Choice

Which of the following statements is most correct?

• A) If two firms pay the same interest rate on their debt and have the same rate of return on assets, and if that ROA is positive, the firm with the higher debt ratio will also have a higher rate of return on common equity.
• B) One of the problems of ratio analysis is that the relationships are subject to manipulation. For example, we know that if we use some of our cash to pay off some of our current liabilities, the current ratio will always increase, especially if the current ratio is weak initially.
• C) Generally, firms with high profit margins have high asset turnover ratios, and firms with low profit margins have low turnover ratios; this result is exactly as predicted by the extended Du Pont equation.
• D) All of the statements above are correct.
• E) None of the statements above is correct.

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Definitions:

Current Yield

The annual income (interest or dividends) divided by the current price of the security, expressed as a percentage.

Yield to Maturity

The total return anticipated on a bond if held until it matures, including both interest payments and the appreciation or depreciation of the bond's value.

Coupon Rate

The interest rate stated on a bond or other fixed income security that the issuer promises to pay annually or semi-annually.

Callable Bonds

Bonds that can be redeemed by the issuer before their maturity date, at a specified call price.