Which of the following statements is CORRECT?
A) Other things held constant,the more debt a firm uses,the higher its operating margin will be.
B) Debt management ratios show the extent to which a firm's managers are attempting to magnify returns on owners' capital through the use of financial leverage.
C) Other things held constant,the more debt a firm uses,the higher its profit margin will be.
D) Other things held constant,the higher a firm's total debt to total capital ratio,the higher its TIE ratio will be.
E) Debt management ratios show the extent to which a firm's managers are attempting to reduce risk through the use of financial leverage.The higher the total debt to total capital ratio,the lower the risk.

Question

Quizplus · Accepted Answer

Debt management ratios, such as debt-to-equity ratio and debt-to-total capital ratio, show how much a company is using financial leverage to magnify returns on owners' capital. A higher ratio indicates that the company is relying more on debt financing to increase shareholder returns. However, a high level of financial leverage also increases the risk of financial distress or bankruptcy. Therefore, there is a tradeoff between risk and return when using debt financing. Option A, C, D, and E are incorrect as they provide incorrect information about the relationship between debt and financial performance or risk management.

Which of the Following Statements Is CORRECT