Which of the Following Statements Is True About the Debt

question 27

Multiple Choice

Which of the following statements is true about the debt to equity ratio?

• A)The greater the debt to equity ratio the smaller the opportunity to increase the return on equity of a firm through financial leverage.
• B)The greater the debt to equity ratio the greater the chance the firm will not meet its debt obligations.
• C)The size of a of a company's debt to equity ratio is directly related to amount of a firm's sales.
• D)The lower the debt to equity ratio the higher the risk that financial leverage will have a negative impact on a firm's return on equity.

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Definitions:

Operating Leverage

A financial ratio that measures the degree to which a company can increase operating income by increasing revenue.

CVP Graph

A graphical depiction of the Cost-Volume-Profit analysis, showing how a company's profits, costs, and sales volume are related.

Break-even Point

The level of production or sales at which total revenues equal total expenses, with no net loss or gain.

Total Sales Revenue

The overall income generated from selling goods or services before any expenses are subtracted.