Which of the Following Statements Is CORRECT

question 43

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%.The firm finances using only debt and common equity,and total assets equal total invested capital.Under these conditions,the ROE will increase.
• 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%.The firm finances using only debt and common equity,and total assets equal total invested capital.Without additional information,we cannot tell what will happen to the ROE.
• C) The DuPont equation provides information about how operations affect the ROE,but the equation does not include the effects of debt on the ROE.
• D) Other things held constant,an increase in the total debt to total capital ratio will result in an increase in the profit margin.
• E) 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%.The firm finances using only debt and common equity,and total assets equal total invested capital.Under these conditions,the ROE will decrease.

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Definitions:

Benefit

The advantage or profit gained from something.

Nash Equilibrium

A condition in strategic games, indicating that each participant's chosen strategy maximizes their payoff, given the strategies selected by others.

Payoff

The outcome of a decision or strategy, often quantified in terms of profit or loss.

Strategy

A plan of action designed to achieve a long-term or overall aim, often used in business, marketing, military, and game theory contexts.