Which of the Following Statements Is CORRECT

question 86

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 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:

Price Elasticity

A gauge for the reaction of the amount of a good sought after to a price modification of that good.

Price Change

A variation in the cost of goods or services over time, which can be influenced by factors such as supply and demand.

Midpoint Method

A technique for calculating the percentage change in a variable, which averages the initial and final values to compute elasticity.

Price Elasticity

A measure of how responsive the quantity demanded of a good is to a change in its price, indicating how shifts in price can affect consumer demand and consumption.