A Firm with a Debt Equity Ratio of 1/2, Return

question 102

Multiple Choice

A firm with a debt equity ratio of 1/2, return on assets of 15%, and return on debt of 10% will have return on equity of:

• A)15.00%
• B)16.67%
• C)20.00%
• D)21.17% r_equity = 0.15 + 1/3(0.15 - 0.10)

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Definitions:

Acid-Test Ratio

A stringent measure of liquidity that assesses a company's ability to meet its short-term obligations without relying on the sale of inventories.

Acid-Test Ratio

A stringent indicator that determines whether a firm has enough short-term assets to cover its immediate liabilities without selling inventory.

Marketable Securities

Financial instruments that are easily convertible into cash, such as stocks and bonds.

Inventory Turnover Ratio

A measure of how many times a company's inventory is sold and replaced over a specific period, indicating the efficiency of inventory management.