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 favourable basis than income from stock.

Question

Quizplus · Accepted Answer

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. This is because the equity multiplier is calculated as total assets divided by total equity, and using debt increases total assets while keeping equity constant, thus increasing the multiplier.

Which of the Following Statements Is Correct