A firm is considering actions which will raise its debt ratio. It is anticipated that these actions will have no effect on sales, operating income, or on the firm's total assets. If the firm does increase its debt ratio, which of the following will occur?
A) Return on assets will increase.
B) Basic earning power will decrease.
C) Times interest earned will increase.
D) Profit margin will decrease.
E) Total assets turnover will increase.

Question

Quizplus · Accepted Answer

If a firm increases its debt ratio, it will have to pay more interest expense, which will reduce its net income. As a result, the profit margin will decrease.

A Firm Is Considering Actions Which Will Raise Its Debt