Which of the Following Statements Is CORRECT

question 103

Multiple Choice

Which of the following statements is CORRECT?

• A)The use of debt financing will tend to lower the basic earning power ratio, other things held constant.
• B)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.
• C)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.
• D)The numerator used in the TIE ratio is earnings before taxes (EBT). EBT is used because interest is paid with post-tax dollars, so the firm's ability to pay current interest is affected by taxes.
• E)All else equal, increasing the total debt to total capital ratio will increase the ROA.

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Definitions:

World Prices

The prices of goods and services determined in the global market that influence the cost and availability of products internationally.

Aggregate Demand

The total amount of goods and services demanded in an economy at a given overall price level and time.

Aggregate Supply

The total quantity of goods and services that producers in an economy are willing and able to supply at different price levels.

Rational Expectations

An economic theory that suggests individuals make decisions based on their best forecasts using all available information.