Which of the following statements is CORRECT?
A) The use of debt financing will tend to lower the basic earning power ratio,other things held constant.
B) A firm that employs financial leverage will have a higher equity multiplier than an otherwise identical firm that has no debt in its capital structure.
C) If two firms have identical sales,interest rates paid,operating costs,and assets,but differ in the way they are financed,the firm with less debt will generally have the higher expected ROE.
D) The numerator used in the TIE ratio is earnings before taxes (EBT).EBT is used because interest is paid with post-tax dollars,so the firm's ability to pay current interest is affected by taxes.
E) Other things held constant,increasing the total debt to total capital ratio will increase the ROA.

Question

Quizplus · Accepted Answer

B) is correct because financial leverage, which involves using debt financing, increases the equity multiplier (Equity Multiplier = Total Assets / Total Equity). A firm with debt in its capital structure will have a higher equity multiplier compared to a firm without debt, assuming everything else is identical. This is because the presence of debt reduces equity, making the ratio larger.

Which of the Following Statements Is CORRECT