Firm A and Firm B have the same total assets, ROA and profit margin (greater than 0). However, Firm B has a higher debt ratio and interest expense than Firm A. Which of the following statements is correct?
A) Firm B must have a higher ROE than Firm A.
B) Firm B must have a higher capital intensity ratio than Firm A.
C) Firm B must have a higher fixed asset turnover than Firm A.
D) Firm B must have a lower ACP than Firm A.

Question

Quizplus · Accepted Answer

Given that Firm B has a higher debt ratio and interest expense but maintains the same ROA and profit margin as Firm A, it implies that Firm B is using its debt more effectively to generate profit, leading to a higher Return on Equity (ROE) due to the leverage effect.

Firm a and Firm B Have the Same Total Assets