Which of the Following Statements Is CORRECT

question 125

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 considered 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 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 total debt to total capital 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.

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Definitions:

Implicit Call Option

A provision in a financial contract that gives the issuer the right, but not the obligation, to take a specified action under certain conditions, often found in bonds.

Include

To contain, encompass, or have something as part of a whole or group.

American Call Option

A financial contract that gives the buyer the right, but not the obligation, to buy a specified quantity of an asset at a predetermined price within a specified time period until expiration.

Underlying Asset

An asset or security on which a derivative instrument, such as a futures or options contract, is based.