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

Firm B's higher debt ratio and interest expense implies that it is employing financial leverage, which increases the company's financial risk. This higher risk, in turn, can lead to a higher return on equity (ROE) compared to Firm A. Therefore, the statement that Firm B must have a higher ROE than Firm A is correct. 
Option B is incorrect because the capital intensity ratio is a measurement of a firm's total assets to sales, and it is not related to debt. 
Option C is also incorrect as it is a measure of a firm's ability to generate sales from its fixed assets, and it is not related to debt. 
Option D is also incorrect since the accounts payable turnover ratio is a measure of how efficiently a firm manages its accounts payable and is not dependent on debt.

Firm a and Firm B Have the Same Total Assets