Most investors and analysts in the financial community pay particular attention to a company's ROE. The ROE can be calculated simply by dividing afirm's net income by the firm's shareholder's equity, and it can be subdivided into the key factors that drive the ROE. Investors and analysts focus onthese drivers to develop a clearer picture of what is happening within a company. An analyst gathered the following data and calculated the variousterms of the DuPont equation for three companies:Company ACompany BCompany CROE12.0%15.5%21.5%Profit Margin57.3%58.2%58.0%X Total Assets Turnover X Equity Multiplier9.810.210.32.142.613.60Referring to these data, which of the following conclusions will be true about the companies' ROES?O The main driver of Company A's inferior ROE, as compared with that of Company B's and Company C's ROE, is its use of higher debtfinancing.O The main driver of Company C's superior ROE, as compared with that of Company A's and Company B's ROE, is its efficient use of assets.O The main driver of Company C's superior ROE, as compared with that of Company A's and Company B's ROE, is its greater use of debtfinancing.

The DuPont equation is a method by which different ratios are used to arrive at the ROE. This can be…

Referring to these data, which of the following conclusions will be true about the companies' ROES? O The main driver of Company A's inferior ROE, as compared with that of Company B's and Company C's ROE, is its use of higher debt financing. O The main driver of Company C's superior ROE, as compared with that of Company A's and Company B's ROE, is its efficient use of assets. O The main driver of Company C's superior ROE, as compared with that of Company A's and Company B's ROE, is its greater use of debt financing.

Referring to these data, which of the following conclusions will be true about the companies' ROES? O The main driver of Company A's inferior ROE, as compared with that of Company B's and Company C's ROE, is its use of higher debt financing. O The main driver of Company C's superior ROE, as compared with that of Company A's and Company B's ROE, is its efficient use of assets. O The main driver of Company C's superior ROE, as compared with that of Company A's and Company B's ROE, is its greater use of debt financing.

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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Similar questions

Which of the following statements is CORRECT? * A company can use its retained earnings without incurring a flotation cost. As a O result, while the cost of retained earnings is not zero, it is usually less expensive than the after-tax cost of debt. The capital structure that minimizes a company's weighted average cost of capital often maximizes its stock price. The capital structure that minimizes the firm's weighted average cost of capital often maximizes its earnings per share. If everything else is stable, and corporate tax rates drops, the Modigliani-Miller tax- adjusted tradeoff principle implies that companies should expand their use of debt. When a corporation learns that the cost of debt is less than the cost of equity, rising the debt ratio would lower the WACC.
In understanding capital structure, one approach, which I adopt, is to demonstrate, under certain assumptions, that financing decisions are irrelevant – in that they have no impact on firm value. Then, we show how relaxing these assumptions impacts optimal financing choices. Group of answer choices True False
Which of the following statements about "avoidable interest" is false? it is computed only on self-constructed assets. it is computed using a weighted-average interest rate on debt and equity financing. it increases assets on the balance sheet. O it is an approximation of the interest expense the firm would have incurred if it financed all construction through debt.
Which of the following is most consistent with using debt to reduce agency costs or conflicts? Question 11 options: Increasing debt reduces a firm’s business risk The interest paid on debt reduces taxable income and income taxes The interest paid on debt reduces cash that management of a firm might otherwise waste or use poorly The issuance of debt helps firms increase their credit rating
Which of these is a main characteristic of debt capital?(a) Investors in debt participate in the ownership of the firm.(b) Investors in debt are paid interest.(c) Debt is more risky for the investor and less risky for the firm.(d) If dividends are not paid, this can lead to foreclosure, legal proceeding and financial distress.
True or false?
A firm’s weighted average cost of capital should not do which one of the following? Group of answer choices measure the cost of short-term sources of funds measure cost on a marginal basis measure the cost of long-term sources of funds measure cost on an after-tax basis
How does a semi-strong market affect a company’s capital structure? Discuss the possible exposures and impact. Provide examples to justify your reasoning.
Case Study: Accounting Assets and Liabilities Introduction: In the realm of accounting, understanding and managing assets and liabilities are fundamental for assessing the financial health and stability of an organization. This case study delves into the accounting practices of XYZ Corporation, a manufacturing company, to illustrate the significance of proper asset and liability management. XYZ Corporation's Asset Management: XYZ Corporation, in its commitment to effective asset management, carefully categorizes its assets into current and non-current. Current assets, such as cash, accounts receivable, and inventory, are monitored closely for liquidity and short-term financial health. Non-current assets, including property, plant, and equipment, are assessed for their long-term value and depreciation. Liability Management and Debt Ratio: To ensure a healthy balance between assets and liabilities, XYZ Corporation meticulously manages its liabilities. Current liabilities, like accounts…

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