ebt and common equity. However, Company HD has the higher total debt to total capital ratio. Which of the following stater Oa. Company HD has a lower equity multiplier than Company LD. Ob. Company HD has a higher fixed assets turnover than Company LD. Oc. Company HD has a lower operating income (EBIT) than Company LD. Od. Company HD has a lower total assets turnover than Company LD. Oe. Company HD has a higher ROE than Company LD.
ebt and common equity. However, Company HD has the higher total debt to total capital ratio. Which of the following stater Oa. Company HD has a lower equity multiplier than Company LD. Ob. Company HD has a higher fixed assets turnover than Company LD. Oc. Company HD has a lower operating income (EBIT) than Company LD. Od. Company HD has a lower total assets turnover than Company LD. Oe. Company HD has a higher ROE than Company LD.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Financial Ratios
A Ratio refers to a figure calculated as a reference to the relationship of two or more numbers and can be expressed as a fraction, proportion, percentage, or the number of times. When the number is determined by taking two accounting numbers derived from the financial statements, it is termed as the accounting ratio.
Return on Equity
The Return on Equity (RoE) is a measure of the profitability of a business concerning the funds by its stockholders/shareholders. ROE is a metric used generally to determine how well the company utilizes its funds provided by the equity shareholders.
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Question
Transcribed Image Text:**Title: Analyzing Financial Ratios: Understanding Debt to Capital Ratios**
**Description:**
In this exercise, we are examining the financial statements of two profitable companies, Company HD and Company LD. Both companies share identical figures in several financial metrics: total assets (TA), total invested capital, sales (S), return on assets (ROA), and profit margin (PM). These companies exclusively use debt and common equity for their financial structuring. Notably, Company HD has a higher total debt to total capital ratio compared to Company LD. Based on this information, determine which of the following statements is correct:
1. **Company HD has a lower equity multiplier than Company LD.**
2. **Company HD has a higher fixed assets turnover than Company LD.**
3. **Company HD has a lower operating income (EBIT) than Company LD.**
4. **Company HD has a lower total assets turnover than Company LD.**
5. **Company HD has a higher ROE than Company LD.**
**Analysis:**
When evaluating the financial health and efficiency of a company, it's crucial to understand how changes in the debt to capital ratio can impact other financial ratios and metrics. Analyze each statement carefully, focusing on how a higher debt to total capital ratio can influence a company's equity multiplier, operating income, assets turnover, and return on equity (ROE).
**Note:**
Consider using formulas to calculate and verify the relationships. For instance, a higher debt to capital ratio often leads to a higher equity multiplier, affecting ROE calculations. Understanding fixed assets turnover and operating income dynamics can offer additional insights into the operational efficiency and profitability of a company.
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