Which of the following statements is CORRECT?
A) an increase in a firm's debt ratio, with no changes in its sales or operating costs, could be expected to lower the profit margin.
B) the ratio of long-term debt to total capital is more likely to experience seasonal fluctuations than is either the dso or the inventory turnover ratio.
C) if two firms have the same roa, the firm with the most debt can be expected to have the lower roe.
D) an increase in the dso, other things held constant, could be expected to increase the total assets turnover ratio.
E) an increase in the dso, other things held constant, could be expected to increase the roe.

Question

Quizplus · Accepted Answer

a. More debt would mean more interest, hence a lower NI, given a constant EBIT. This would lower the profit margin = NI/Sales.
b. Sales fluctuations would have more effects on the DSO and S/Inventory ratios.
c. ROE = ROA × Equity multiplier, so more debt, higher ROE for given ROA.
d. DSO = Receivables/Sales per day. With sales constant, an increase in DSO would mean an increase in receivables, hence a decline, not a rise, in the TATO.
e. An increase in the DSO might increase or decrease ROE, depending on how it affected sales and costs.

Which of the Following Statements Is CORRECT