Which of the following statements is CORRECT?
A) if two firms differ only in their use of debtσi.e., they have identical assets, sales, operating costs, and tax ratesσbut one firm has a higher debt ratio, the firm that uses more debt will have a higher profit margin on sales.
B) if one firm has a higher debt ratio than another, we can be certain that the firm with the higher debt ratio will have the lower tie ratio, as that ratio depends entirely on the amount of debt a firm uses.
C) a firm's use of debt will have no effect on its profit margin on sales.
D) if two firms differ only in their use of debtσi.e., they have identical assets, sales, operating costs, interest rates on their debt, and tax ratesσbut one firm has a higher debt ratio, the firm that uses more debt will have a lower profit margin on sales.
E) the debt ratio as it is generally calculated makes an adjustment for the use of assets leased under operating leases, so the debt ratios of firms that lease different percentages of their assets are still comparable.

Question

Quizplus · Accepted Answer

a is incorrect. The reverse is true. b is false, because the TIE also depends on the interest rate and EBIT. c is false, because interest affects the profit margin. d is correct, because the more interest the lower the profits, hence the lower the profit margin. e is simply incorrect.

Which of the Following Statements Is CORRECT