Which of the following statements is most correct?
A) If Company A has a higher debt ratio than Company B, then we can be sure that A will have a lower times-interest-earned ratio than B.
B) Suppose two companies have identical operations in terms of sales, cost of goods sold, interest rate on debt, and assets. However, Company A uses more debt than Company B; that is, Company A has a higher debt ratio. Under these conditions, we would expect B's profit margin to be higher than A's.
C) The ROE of any company which is earning positive profits and which has a positive net worth (or common equity) must exceed the company's ROA.
D) Statements a, b, and c are true.
E) Statements a, b, and c are false.

Question

Quizplus · Accepted Answer

If two companies have identical operations, but one uses more debt, then the one with less debt (Company B) will have a higher profit margin. This is because the interest expense on Company A's debt will decrease its net income, thus decreasing its profit margin. Statements A and C are not necessarily true in all cases.

Which of the Following Statements Is Most Correct