If a firm's return on investment, i.e., earnings after taxes divided by total assets, is 7%, and the firm has no preferred stock financing, it is
A)possible that its return on stockholders' equity is 10%.
B)possible that its return on stockholders' equity is 5%.
C)not possible for its debt-to-equity ratio to be 1.0.
D)not possible for its net profit margin to be 7%.

Question

Quizplus · Accepted Answer

It is possible for a firm's return on stockholders' equity to be higher than its return on investment if the firm has borrowed money at a lower interest rate than its earnings yield on its assets. This would increase the return on equity. However, it is not possible for the debt-to-equity ratio to be 1.0 or for the net profit margin to be 7% if the return on investment is also 7%.

If a Firm's Return on Investment, I