Which of the following statements is most correct?
A) If a firm's ROE and ROA are the same, this implies that the firm is financed entirely with common equity. (That is, common equity = total assets).
B) If a firm has no lease payments or sinking fund payments, its times-interest-earned (TIE) ratio and fixed charge coverage ratios must be the same.
C) If Firm A has a higher market to book ratio than Firm B, then Firm A must also have a higher price earnings ratio (P/E).
D) All of the statements above are correct.
E) Answers a and b are correct.

Question

Quizplus · Accepted Answer

A) This statement is incorrect. It is possible for a firm's ROE and ROA to be the same even if it is not entirely financed with common equity. For example, if a firm has debt that carries an interest rate exactly equal to its ROA, then its ROE and ROA will be the same even if it has debt in its capital structure.
B) This statement is correct. Both ratios incorporate the same elements of the income statement, so if lease payments and sinking fund payments are not present, the two ratios will be equal.
C) This statement is incorrect. The market to book ratio and P/E ratio are not directly related. A company with a high market to book ratio might have a high P/E ratio or a low P/E ratio, as the P/E ratio depends on the earnings of the company in addition to its market value.

Which of the Following Statements Is Most Correct