Firm A and Firm B have the same total assets, ROA and profit margin. However, Firm B has a higher debt ratio and interest expense than Firm A. Which of the following statements is correct?
A) Firm B must have a higher ROE than firm A.
B) Firm B must have a higher capital intensity ratio than Firm A.
C) Firm B must have a higher fixed asset turnover than Firm A.
D) Firm B must have a lower ACP than Firm A.

Question

Quizplus · Accepted Answer

Firm B must have a higher ROE than Firm A because ROE is calculated by multiplying ROA with leverage (debt ratio). As Firm B has a higher debt ratio, its leverage is higher than Firm A, which would lead to a higher ROE. The other options are not necessarily related to the higher debt ratio and interest expense of Firm B.

Firm a and Firm B Have the Same Total Assets