Which of the Following Statements Is CORRECT

question 3

Multiple Choice

Which of the following statements is CORRECT?

• A) All else equal, increasing the debt ratio will increase the ROA.
• B) The use of debt financing will tend to lower the basic earning power ratio, other things held constant.
• C) A firm that employs financial leverage will have a higher equity multiplier than an otherwise identical firm that has no debt in its capital structure.
• D) If two firms have identical sales, interest rates paid, operating costs, and assets, but differ in the way they are financed, the firm with less debt will generally have the higher expected ROE.
• E) Holding bonds is better than holding stock for investors because income from bonds is taxed on a more favorable basis than income from stock.

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Definitions:

Yearly Contributions

The total amount of money added to a fund or investment over the course of a year.

Rate of Interest

The percentage of a sum of money charged for its use, often expressed annually.

Compounded Semi-Annually

Interest on an investment or loan calculated twice a year and then added to the principal amount, affecting future interest calculations.

Retirement Plan

A financial strategy designed to help individuals save and invest money to provide for financial security in their retirement years.