Which of the following statements is most correct?
A) If two companies have the same return on equity, they should have the same stock price.
B) If Company A has a higher profit margin and higher total assets turnover relative to Company B, then Company A must have a higher return on assets.
C) If Company A and Company B have the same debt ratio, they must have the same times interest earned (TIE) ratio.
D) Answers b and c are correct.
E) None of the answers above is correct.

Question

Quizplus · Accepted Answer

Return on assets is calculated by multiplying profit margin and total assets turnover. Therefore, if Company A has higher profit margin and higher total assets turnover, it must have a higher return on assets. The other statements are incorrect because stock price depends on various factors other than just return on equity, and TIE ratio depends on factors other than just debt ratio.

Which of the Following Statements Is Most Correct