Which of the Following Statements Is Correct

question 90

Multiple Choice

Which of the following statements is correct?

• A) If two firms pay the same interest rate on their debt and have the same rate of return on assets,and if that ROA is positive,the firm with the higher debt ratio will also have a higher rate of return on common equity.
• B) One of the problems of ratio analysis is that the relationships are subject to manipulation.For example,we know that if we use some of our cash to pay off some of our current liabilities,the current ratio will always increase,especially if the current ratio is weak initially.
• C) Generally,firms with high profit margins have high asset turnover ratios,and firms with low profit margins have low turnover ratios;this result is exactly as predicted by the Du Pont equation.
• D) Firms A and B have identical earnings and identical dividend payout ratios.If Firm A's growth rate is higher than that of Firm B,Firm A's P/E ratio must be greater than Firm B's P/E ratio.
• E) None of the above statements is correct.

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Definitions:

Covariance

A measure indicating the extent to which two random variables change in tandem.

Covariance

A measure that indicates the extent to which two variables change together, showing if increases in one variable correspond to increases or decreases in another.

Degrees Of Freedom

The number of values in the calculation of a statistic that are free to vary, often related to the sample size.

Pearson Correlation

A measure of the linear correlation between two variables, giving a value between -1 and 1 inclusive, where 1 is total positive linear correlation, 0 is no linear correlation, and -1 is total negative linear correlation.