Which of the Following Statements Is CORRECT

question 4

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%.Under these conditions, the ROE will decrease.
• 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%.Under these conditions, the ROE will increase.
• C) 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%.Without additional information, we cannot tell what will happen to the ROE.
• D) The modified DuPont equation provides information about how operations affect the ROE, but the equation does not include the effects of debt on the ROE.
• E) Other things held constant, an increase in the debt ratio will result in an increase in the profit margin on sales.

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Definitions:

Bankruptcy Code

The set of laws that governs the process of bankruptcy in the United States, which allows individuals and businesses to discharge their debts or reorganize their financial obligations.

Automatic Stay

A legal provision that automatically stops lawsuits, foreclosures, garnishments, and all collection activity against the debtor the moment a bankruptcy petition is filed.

Secured Creditors

Creditors who have a legal right to specific assets of a debtor as collateral for the debts owed to them.

Repossession Proceedings

The legal process by which a lender takes back property when the borrower defaults on payments.