Which of the following statements is CORRECT?
A) 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.
B) A firm's use of debt will have no effect on its profit margin on
Sales.
C) If two firms differ only in their use of debt-i.e., they have identical assets, sales, operating costs, interest rates on their debt, and tax rates-but one firm has a higher debt ratio, the firm
That uses more debt will have a lower profit margin on sales.
D) 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.
E) If two firms differ only in their use of debt-i.e., they have identical assets, sales, operating costs, and tax rates-but one firm has a higher debt ratio, the firm that uses more debt will
Have a higher profit margin on sales.

Question

Quizplus · Accepted Answer

A higher debt ratio typically results in higher interest expenses, which reduces net income and thus lowers the profit margin on sales.

Which of the Following Statements Is CORRECT