Question

Which of the following statements is CORRECT? a. Other things held constant, an increase in the debt ratio will result in an increase in the profit margin on sales. b. Suppose a firm's total assets turnover ratio falls from 10% to 9%, but at the same time its profit margin rises from 9% to 10%, and its debt increases from 40% of total assets to 60%. Under these conditions, the ROE will decrease. c. The modified Du Pont equation provides information about how operations affect the ROE, but the equation does include the effects of debt on the ROE. d. Suppose a firm's total assets turnover ratio falls from 10% to 9%, but at the same time its profit margin rises from 9% to 10%, and its debt increases from 40% of total assets to 60%. Without additional information, we cannot tell what will happen to the ROE. e. Suppose a firm's total assets turnover ratio falls from 10% to 9%, but at the same time its profit margin rises from 9% to 10%, and its debt increases from 40% of total assets to 60%. Under these conditions, the ROE will increase.

Answer 1

Answer:

E. Suppose a firm's total assets turnover ratio falls from 10% to 9%, but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%. Under these conditions, the ROE will increase.