Which of the Following Statements Is CORRECT

question 44

Multiple Choice

Which of the following statements is CORRECT?

• A) Other things held constant, the less debt a firm uses, the lower its return on total assets will be.
• B) The advantage of the basic earning power ratio (BEP) over the return on total assets for judging a company's operating efficiency is that the BEP does not reflect the effects of debt and taxes.
• C) The return on common equity (ROE) is generally regarded as being less significant, from a stockholder's viewpoint, than the return on total assets (ROA).
• D) The price/earnings (P/E) ratio tells us how much investors are willing to pay for a dollar of current earnings. In general, investors regard companies with higher P/E ratios as being more risky and/or less likely to enjoy higher future growth.
• E) Suppose you are analyzing two firms in the same industry. Firm A has a profit margin of 10% versus a margin of 8% for Firm B. Firm A's debt ratio is 70% versus 20% for Firm B. Based only on these two facts, you cannot reach a conclusion as to which firm is better managed, because the difference in debt, not better management, could be the cause of Firm A's higher profit margin.

---

Definitions:

Partnership Property Rights

entail the legal interests and entitlements in property held by a partnership, distinct from the personal property of the individual partners.

Personal Debt

Debt incurred for personal, as opposed to business, needs, including credit card debt, mortgages, and personal loans.

Profits Distribution

The allocation of a company's earnings to its shareholders, often in the form of dividends.

Capital Contributed

The amount of money or assets that shareholders have invested in a company.