Which of the Following Statements Is CORRECT

question 104

Multiple Choice

Which of the following statements is CORRECT?

• A) If one firm has a higher debt ratio than another, we can be certain that the firm with the higher debt 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 on
• Sales.
• C) If two firms differ only in their use of debt-i.e., they have identical assets, sales, operating costs, interest rates on their debt, and tax rates-but one firm has a higher debt ratio, the firm
• That uses more debt will have a lower profit margin on sales.
• D) The debt 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, sales, operating costs, and tax rates-but one firm has a higher debt ratio, the firm that uses more debt will
• Have a higher profit margin on sales.

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Definitions:

Arbitrage Opportunities

Situations where a financial instrument, or a combination of financial instruments, can be bought and sold simultaneously in different markets to profit from price discrepancies.

Risk-Free Rate

The return on investment with no risk of financial loss, often represented by the yield on government securities.

Nonsystematic Standard Deviation

A measure of variance in a portfolio's total returns attributable to factors specific to individual securities, as opposed to the market.

Equally-Weighted Portfolio

An equally-weighted portfolio is an investment strategy that gives the same weight, or importance, to each asset in the portfolio, regardless of the size or market value of the companies.