If a firm decreases its operating costs,all else constant,then
A)the profit margin increases while the cash coverage ratio decreases.
B)the return on assets increases while the return on equity decreases.
C)both the return on assets and the return on equity increase.
D)both the profit margin and the equity multiplier increase.
E)the total asset turnover rate decreases while the profit margin increases.

Question

Quizplus · Accepted Answer

If a firm decreases its operating costs, all else constant, it means it is increasing its efficiency, which results in higher return on assets and return on equity. This is because the firm is achieving a higher level of profitability with the same level of assets and equity. Therefore, option C is correct. Option A is incorrect because a decrease in operating costs would increase the cash coverage ratio, not decrease it. Option B is incorrect because both the return on assets and the return on equity would increase, not one increase and the other decrease. Option D is incorrect because a decrease in operating costs would not necessarily result in an increase in the equity multiplier. Option E is incorrect because a decrease in operating costs would likely result in an increase in the total asset turnover rate, not a decrease.

If a Firm Decreases Its Operating Costs,all Else Constant,then