Which of the Following Statements Is CORRECT

question 49

Multiple Choice

Which of the following statements is CORRECT?

• A) If two firms differ only in their use of debt¾i.e., they have identical assets, sales, operating costs, and tax rates¾but one firm has a higher debt ratio, the firm that uses more debt will have a higher profit margin on sales.
• B) If one firm has a higher debt ratio than another, we can be certain that the firm with the higher debt ratio will have the lower TIE ratio, as that ratio depends entirely on the amount of debt a firm uses.
• C) A firm's use of debt will have no effect on its profit margin on sales.
• D) If two firms differ only in their use of debt¾i.e., they have identical assets, sales, operating costs, interest rates on their debt, and tax rates¾but one firm has a higher debt ratio, the firm that uses more debt will have a lower profit margin on sales.
• E) The debt ratio as it is generally calculated makes an adjustment for the use of assets leased under operating leases, so the debt ratios of firms that lease different percentages of their assets are still comparable.

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Definitions:

Econometrics

The application of statistical methods to economic data to give empirical content to economic relationships.

Empirical Economics

An approach to economics that relies on real-world data and statistical analysis to validate or disprove theories and models.

Normative Statement

An assertion that expresses a judgment about what ought to be, based on values or opinions rather than facts.

Living Wage

A wage that is high enough to maintain a normal standard of living, covering basic expenses such as housing, food, taxes, and healthcare.