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 is most correct about the cost of capital? The cost of debt reflects the interest rates on debt capital before taking into account the tax effects. Cost of capital is affected by the required rates of return of each of the source of capital, regardless of the capital structure. The capital asset pricing model is the most widely used model to estimate the cost of common equity. To minimize the cost of capital, firms should borrow more than their capacity because increasing the lower cost of debt yields the lowest cost of capital, thus, enhances shareholder value.
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.
Which of the following statements are true about the interest-burden ratio? Check all that apply: It can be expressed as EBIT/Interest Expense. If the company has no financial leverage, the interest-burden ratio will be equal to 0. A company with higher financial leverage will have a lower interest-burden ratio. If the company has no financial leverage, the interest-burden ratio will be equal to 1. It can be expressed as Net profits/Pretax profits.
How many statements below are correct about the Modigliani-Miller theorem? i. The theorem is not an exact description of reality. ii. The theorem provides a benchmark to understand how the capital structure could affect WACC. iii. The theorem implies that firms have benefited from financing with debt due to a higher required rate of return on debt compared with equity. iv. The value of the firm is not affected by its capital structure under any assumptions.
Please explain: Managers estimate bad debt expense based on which of the following? professional judgement, revenue recognization principle, histroical-cost assumption, or cost constraint?
Which of the following is NOT an acceptable basis on which to measure an expense? A cash outflow. O A pro rata measure. O An estimation. O All of these options are acceptable. O An invoice price. Which of the following is a likely explanation as to why preparers would choose to deliberately understate the reported profit of a listed entity? O To reduce investors' expectations of future earnings. O To decrease the entity's weighted average cost of capital. To reduce the entity's tax liability. O To satisfy the qualitative characteristic of faithful representation. O All of these are likely explanations why preparers would deliberately understate the reported profit.
Why do analysts need to consider different factors when evaluating a company’s ability to repay short-term versus long-term debt?
debt can bo soon as a remedy for agency costs and -problems, and therefore create value in companies. However, in certain circumstances debt can also be responsible for aggravating agency problems, and load to value destruction in companies. Please explain and discuss this statement.
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…
True of False? Contributed capital decreases when the company has a net loss. If your answer is “False”, then explain (in one sentence) why the statement is false.

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