Which of the Following Statements Is CORRECT

question 3

Multiple Choice

Which of the following statements is CORRECT?

• A) All else equal, increasing the debt ratio will increase the ROA.
• B) The use of debt financing will tend to lower the basic earning power ratio, other things held constant.
• C) 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.
• D) 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.
• E) Holding bonds is better than holding stock for investors because income from bonds is taxed on a more favorable basis than income from stock.

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Definitions:

Type II Error

In research, the mistake of thinking that one variable does not have an effect on or relationship with another, when really it does.

Empirical Method

A way of gaining knowledge by means of direct and indirect observation or experience.

Type I Error

In research, the mistake of thinking that one variable has an effect on, or relationship with, another variable, when really it does not.

Factor Analytically Derived

Factor analytically derived refers to constructs or variables identified through factor analysis, a statistical method used to explore underlying relationships among observed measures.