Which of the Following Statements Is CORRECT

question 14

Multiple Choice

Which of the following statements is CORRECT?

• A) Increasing financial leverage is one way to increase a firm's basic earning power (BEP).
• B) If a firm lowered its fixed costs while increasing its variable costs, holding total costs at the present level of sales constant,
• This would decrease its operating leverage.
• C) The debt ratio that maximizes EPS generally exceeds the debt ratio
• That maximizes share price.
• D) If a company were to issue debt and use the money to repurchase common stock, this action would have no impact on its basic earning power ratio. (Assume that the repurchase has no impact on the
• Company's operating income.)
• E) If changes in the bankruptcy code made bankruptcy less costly to corporations, this would likely reduce the average corporation's debt ratio.

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Definitions:

Net Income

The total profit of a company after all expenses and taxes have been deducted from revenues.

Owner's Equity

The residual interest in the assets of an entity after deducting liabilities, representing the owner's claim on the business assets.

Falling Prices

A situation where the general level of prices of goods and services in an economy is decreasing over time.

Balance Sheet

A financial statement that lists assets, liabilities, and equity of a company at a specific point in time, showing its financial position.