Which of the following statements is most correct?
A) If Firms A and B have the same level of earnings per share, and the same market to book ratio, they must have the same price earnings ratio.
B) Firms A and B have the same level of net income, taxes paid, and total assets. If Firm A has a higher interest expense, its basic earnings power ratio (BEP) must be greater than that of Firm B.
C) Firms A and B have the same level of net income. If Firm A has a higher interest expense, its return on equity (ROE) must be greater than that of Firm B.
D) All of the answers above are correct.
E) None of the answers above is correct.

Question

Quizplus · Accepted Answer

The basic earnings power ratio (BEP) measures the ability of a firm to generate operating earnings from its assets, without the influence of taxes and leverage. Since both firms have the same level of net income, taxes paid, and total assets, the firm with a higher interest expense would have a lower net operating income, resulting in a higher BEP ratio. Statements A and C are incorrect as they make assumptions that may not always hold true. Statement D is incorrect as only statement B is correct.

Which of the Following Statements Is Most Correct