Question

Which of the following statements is most correct?

a. It is more important to adjust the Debt/Assets ratio than the inventory turnover ratio to account for seasonal fluctuations

b. An increase in the DSO, other things held constant, would generally lead to an increase in the ROE

c. In a competitive economy, where all firms earn similar returns on equity, one would expect to find lower profit margins for airlines, which require a lot of fixed assets relative to sales, than for fresh fish markets

d. An increase in the DSO, other things held constant, would generally lead to an increase in the total asset turnover ratio

e. An increase in a firm's debt ratio, with no changes in its sales and operating costs, could be expected to lower its profit margin on sales

Answer 1

when there would be an increase in debt ratio of the firm it mean that the interest expenses of the company will be increasing and if there would not be an increase in the sales of the company and operating cost of the company then it could be taken for constant growth of operating profit but due to the effect of the interest cost, net profit will be decreasing substantially for the equity shareholders.

Rest of the given options are not as correct as the one stated above and they are not reflecting the appropriate scenarios.

Correct answer would be option (e)An increase in a firm's debt ratio, with no changes in its sales and operating costs, could be expected to lower its profit margin on sales