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 debt 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 debt ratio, the lower the risk.

Question

Quizplus · Accepted Answer

Debt management ratios provide information on how a firm's managers are using financial leverage to increase returns on owners' capital. A higher debt ratio indicates that the firm is using more debt to finance its operations, which can magnify returns but also increases the risk of financial distress. Options A, C, and D are incorrect as they provide false statements. Option E is also incorrect as a higher debt ratio increases the risk rather than reducing it.

Which of the Following Statements Is CORRECT