Which of the Following Statements Is CORRECT

question 43

Multiple Choice

Which of the following statements is CORRECT?

• A) Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9,but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%.The firm finances using only debt and common equity,and total assets equal total invested capital.Under these conditions,the ROE will increase.
• B) Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9,but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%.The firm finances using only debt and common equity,and total assets equal total invested capital.Without additional information,we cannot tell what will happen to the ROE.
• C) The DuPont equation provides information about how operations affect the ROE,but the equation does not include the effects of debt on the ROE.
• D) Other things held constant,an increase in the total debt to total capital ratio will result in an increase in the profit margin.
• E) Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9,but at the same time its profit margin rises from 9% to 10%and its debt increases from 40% of total assets to 60%.The firm finances using only debt and common equity,and total assets equal total invested capital.Under these conditions,the ROE will decrease.

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Definitions:

Statutes Of Limitations

Laws that set the maximum time after an event within which legal proceedings may be initiated.

Law Of Repudiation

The legal doctrine concerning the refusal of a party to honor a contract, which can result in the contract being voided and possible damages awarded for breach of contract.

Substantial Performance Doctrine

A legal principle stating that if a party to a contract fulfills enough of its duties to warrant payment, they may be entitled to payment less any damages caused by their failure to fully comply with the contract terms.

Contract Price

The financial consideration stipulated in a contract that is agreed upon by both parties for the sale, lease, or other forms of exchange.