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:

Capital Drawing

Withdrawals made by the owner(s) from the business for personal use, reducing the total capital invested in the business.

Journalize

The process of recording business transactions in the journal as part of the accounting cycle.

Transactions

Financial events that result in changes to the financial position of a company, such as sales, purchases, and payments.

Equipment

Long-term assets that are used in the production of goods and services; these are tangible in nature.