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)Holding bonds is better than holding stock for investors because income from bonds is taxed on a more favorable basis than income from stock.
E)All else equal, increasing the debt ratio will increase the ROA.

Question

Quizplus · Accepted Answer

Using financial leverage (debt) increases the equity multiplier, which is a measure of financial leverage. The equity multiplier is calculated as total assets divided by total equity, and with more debt, total equity is lower, thus increasing the equity multiplier.

Which of the Following Statements Is CORRECT