Which of the following statements is most correct?
A)An increase in a firm's debt ratio, with no changes in its sales and operating costs, could be expected to lower its profit margin on sales.
B)An increase in DSO, other things held constant, would generally lead to an increase in the total asset turnover ratio.
C)An increase on the DSO, other things held constant, would generally lead to an increase in the ROE.
D)In a competitive economy, where all firms earn similar returns on equity, one would expect to find lower profit margins for airlines, which require a lot of fixed assets relative to sales, than for fresh fish markets.
E)It is more important to adjust the Debt/Asset ratio than the inventory turnover ratio to account for seasonal fluctuations.

Question

Quizplus · Accepted Answer

An increase in a firm's debt ratio, with no changes in its sales and operating costs, could be expected to lower its profit margin on sales. This is because the interest expense associated with the increased debt will lower the firm's net income, which will in turn decrease the profit margin. The other options are either incorrect or do not have a clear answer.

Which of the Following Statements Is Most Correct