Which of the Following Statements Is CORRECT

question 112

Multiple Choice

Which of the following statements is CORRECT?

• A) If one firm has a higher total debt to total capital ratio than another,we can be certain that the firm with the higher total debt to total capital ratio will have the lower TIE ratio,as that ratio depends entirely on the amount of debt a firm uses.
• B) A firm's use of debt will have no effect on its profit margin.
• C) If two firms differ only in their use of debt-i.e. ,they have identical assets,identical total invested capital,sales,operating costs,interest rates on their debt,and tax rates-but one firm has a higher total debt to total capital ratio,then the firm that uses more debt will have a lower profit margin on sales and a lower return on assets.
• D) The total debt to total capital ratio as it is generally calculated makes an adjustment for the use of assets leased under operating leases,so the debt ratios of firms that lease different percentages of their assets are still comparable.
• E) If two firms differ only in their use of debt-i.e. ,they have identical assets,identical total invested capital,operating costs,and tax rates-but one firm has a higher total debt to total capital ratio,then the firm that uses more debt will have a higher operating margin and return on assets.

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Definitions:

Market Exposure

The extent to which a company or an investment is exposed to fluctuations in the values of its markets, potentially affecting its profitability.

Ethnocentric Staffing Model

A staffing approach used by multinational companies where key management positions are filled by personnel from the home country.

Subsidiaries

Companies that are owned or controlled by another company, often referred to as the parent company.

Upper-Management Positions

Roles within an organization that involve high-level decision-making responsibilities and oversight of the company or its major departments.