A. Return on assets must beabove the industry average.B. Total assets turnover must beabove the industry average.C. Total assets turnover must bebelow the industry average.D. Statements a and b are correct.E. None of the statements aboveis correct. You observe that a firm?sprofit margin is below theindustry average, while itsreturn on equity and debtratio exceed the industryaverage. What can youconclude?

you observer the firm, the profit margin is below the industry average, while its return on equity…

Answered: ou observe that a firm?s rofit margin…

ou observe that a firm?s rofit margin is below the ndustry average, while its eturn on equity and debt atio exceed the industry

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter11: Determining The Cost Of Capital

Section: Chapter Questions

Problem 3Q

See similar textbooks

Related questions

Q: Which of the following businesses are most exposed to interest rate risk? * A. A company with…

A: Interest means amount needs to be paid on regular basis in exchange of loan amount borrowed.…

Q: Which of the following does NOT directly affect a company's cost of equity? Select one: a. Return…

A: The capital asset pricing model (CAPM) describes the relationship between the expected return and…

Q: If the after-tax cost of debt is less than the cost of equity in a fırm, which of the following…

A: The weighted average capital cost (WACC) consists of the measurement of a capital price of the…

Q: Suppose a company has a days sales outstanding (DSO) that is considerably higher than itsindustry…

A: DSO tells about the days in which a firm will receive cash from its debtors for the sales made.

Q: Explain the effect of D/E on asset returns, equity returns (assuming that cost of debt is not…

A: Three main actors of production namely land, labor and capital are given primary importance. Capital…

Q: Explain why the following statement is true: "All else the same, firms with relatively stable sales…

A: 1.Stable sales indicate stable cash flows which means that the firm will be able to service its…

Q: In general, as a company increases the amount of short-term financing relative to long-term…

A: Explanation : An increase in the proportion of short-term financing will not affect a company’s…

Q: tatement is true b. The above sta

A: Explanation : In simple words, fixed incomes instruments like bonds and notes pays their holders a…

Q: How would each of the following scenarios affect a firm's cost of debt, r d (l - t), t=tax rate; its…

A: Overview: Weighted average cost of capital (WACC) : Weighted average cost of capital is the mean…

Q: Is the debt level that maximizes a firm’s expected EPS the same as the debt level that maximizesits…

A: Capital structure refers to the securities or debt included in the total capital of the firm.…

Q: Given that a firm is well within its current ratio and debt ratio covenants and that interest rates…

A: The firm cash and cash equivalents and debt is determined by the current ratio and debt ratio and if…

Q: Which of the following statements is false? A. Banks have high levels of liquidity assets and…

A: Duration of bond measures the sensitivity of prices of bonds with change in interest rate in the…

Q: Suppose that the yield of bonds issued by firms XYZ decreased. Which of the following the scenario…

A: when YEILD on bond decrease than means interest rates are going down that will increase the price of…

Q: w would each of the following scenarios affect a firm's cost of debt, r d (l - t), t=tax rate; its…

A: Note : As per the guidelines, only first three parts will be answered.

Q: firm has a debt-to-equity ratio of 0.60 and a market-to-book ratio of 4.0. What is the ratio of the…

A: Debt to equity ratio = book value of debt/book value of equity Market to book value = market value…

Q: How would each of the following scenarios affect a firm's cost of debt, ra(1-T); its cost of equity,…

A: Weighted average cost of capital (wacc) is calculated as sum of the after-tax cost of debt and cost…

Q: Discuss the following statement: All else equal, firms with relatively stable sales are able tocarry…

A: Higher sales generate more profit in the organization. If an organization is able to generate stable…

Q: A firm's equity beta is 1.2 and its debt is risk free. Given a 0.7 debt to equity ratio, what is the…

A: Asset beta shows how the company is uses its sources of financing with respect to risk and weight.…

Q: 19. The question "Did the common stockholders receive an adequate retum on their investment?" is…

A: Financial ratios Financial ratios are those ratios that are derived using the numerical values…

Q: Which of the following statements is correct?(a) The quickest way to determine whether the firmhas…

A: a) Time interest earned ratio is a ratio that is calculated that shows an indication about the…

Q: An investor worried about a company’s long-term solvency would most likely examine its:C .…

Q: I need help with a question please: complete it before 3.00 pm Some Chief Financial Officers were…

A: Capital is a broad term that describes what gives an owner value and usefulness. For example:…

Q: For each statement indicate whether it is true or false and briefly explain why. a) In a perfect…

A: 1) Given statement : In a perfect capital market with no corporate taxes, as a firm takes on more…

Q: Why does the WACC decrease as a firm begins to take on debt and then increase after a certain point?

A: WACC: It is also known as Weighted Average Cost of Capital. It is the mixture of weighted cost of…

Q: Which of the following events will reduce the company’s WACC?

A: Capital Asset Pricing Model (CAPM) describes the risk-return trade-off for securities. It…

Q: You are analyzing the leverage of two firms and you note the following (all values in millions of…

A: Market Debt to Equity Ratio = Debt /Market value of Equity Book Debt to Equity Ratio = Debt /Book…

Q: How would each of the following scenarios affect a firm's cost of debt, r d (l - t), t=tax rate; its…

A: WACC is computed as the sum of the after-tax cost of debt and cost of equity proportionate to their…

Q: Du Pont Analysis. CFA Corp. has a debt-equity ratio that is lower than the industry average, but its…

A: We begin by looking at each of the two ratios given in the question - the Debt-Equity ratio and the…

Q: You are trying to determine your firms cost of debt capital. The only debt on the balance sheet is a…

A: after-tax cost of debt = Cost of debt×(1-tax rate) According to the Debt-Rating Approach: cost of…

Q: /hich of the following statements is the most reasonable conclusion from the given information below…

A: The debt ratio is the total debt being used as compared to total assets and it is indicative of the…

Q: Assuming Target’s industry had an average current ratio of 1.0 and an average debtto equity ratio of…

A: Current ratio of the company means ratio of current assets with current liabilities. It means how…

Q: Which statement is most correct? * A. Since debt financing raises the firm’s financial risk,…

A: Option b is correct.

Q: A firm has a debt-to-equity ratio of 2. What is its equity multiplier?

A: Debt to equity ratio = Total debt / Total equity Debt ratio of 2 means debt is 2 times of equity…

Q: Given the above information, what is the Market value of the firm's debt? $. Given the above…

A: Market value of debt = No. of bonds trading in market * Price per bond = 7,250 * $1,025 =…

Q: Vhich of the following statements is the most reasonable conclusion from the given formation below…

A: Solution Concept Return on equity is given as =net profit/total equity Working note ROE of ABC…

Q: (1) Why do analysts need to consider different factorswhen evaluating a company’s ability to repay…

A: Disclaimer: “Since you have asked multiple question, we will solve the first question for you. If…

Q: Why is the following statement true? “Other things being the same, firmswith relatively stable sales…

A: Introduction: This question is related to the concept of accounting and finance. Corporate money…

Question

A. Return on assets must be
above the industry average.
B. Total assets turnover must be
above the industry average.
C. Total assets turnover must be
below the industry average.
D. Statements a and b are correct.
E. None of the statements above
is correct.

You observe that a firm?s
profit margin is below the
industry average, while its
return on equity and debt
ratio exceed the industry
average. What can you
conclude?

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Classification and Prediction of Corporate Financial Distress

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

How would each of the following scenarios affect a firm’s cost of debt, rd( 1 − T); itscost of equity, rs; and its WACC? Indicate with a plus (+), a minus (−), or a zero (0)whether the factor would raise, lower, or have an indeterminate effect on the item inquestion. Assume for each answer that other things are held constant, even though insome instances this would probably not be true. Bo prepared to justify your answerbut recognize that several of the parts have no single correct answer. These questionsare designed to stimulate thought and discussion.
According to Modigliani & Miller M Proposition II (MM Il), as a firm's debt-equity ratio decreases, what happens to the required rate of return on equity? Briefly explain including the key aspect of MM II.
How would each of the following scenarios affect a firm’s cost of debt, kd(1 – T); its cost of equity ke and its WACC? Indicate with a plus sign (+), a minus (-) or a zero if the factor would raise, would lower or would have indeterminate effect on the item in question. Assume for each answer that other things are held constant even though in some instances this would probably not be true. Be prepared to justify your answer but recognize that several of the parts have no single correct answer.
Explain the effect of D/E on asset returns, equity returns (assuming that cost of debt is not affected), asset beta and equity beta (assuming that debt beta is zero). Should an investor choose to invest in a stock of a company with high or low D/E, or why expected returns on these stocks are equivalent, although they are not equal?
Which of the following statements is correct?(a) The quickest way to determine whether the firmhas too much debt is to calculate the Timesinterest-earned ratio.(b) The best rule of thumb for determining the firm’sliquidity is to calculate the current ratio.(c) From an investor’s point of view, the price-toearnings ratio is a good indicator of whether ornot a firm is generating an acceptable return tothe investor.(d) The operating margin is determined by subtracting all operating and non-operating expensesfrom the gross margin.
Assume that the risk-free rate increases, but the market risk premium remains constant. What impact would this have on the cost of debt? What impact would it have on the cost of equity? How should the capital structure weights are used to calculate the WACC be determined?
Is the debt level that maximizes a firm's expected EPS the same as the one that maximizes its stock price? Explain. Explain how a firm might shift its capital structure so as to change its weighted average cost of capital (WACC). What would be the impact on the value of the firm?
Which of the below statements does the MM Proposition I predict? A. In a perfect market, the value of a firm is independent of its capital structure B.In a perfect market, the discount rate depends on the capital structure C.In a perfect market, the value of a firm decreases in leverage D.In a perfect market, the NPY of investments depends on the existing debt/equity mix
Which of the following does NOT directly affect a company's cost of equity? Select one: a. Return on assets b. Expected market return c. Risk-free rate of return d. The company's beta
Which of the following statements are CORRECT? Check all that apply: The aftertax cost of debt decreases when the market price of a bond increases. A decrease in a firm's WACC will increase the attractiveness of the firm's investment options. Cost of capital is also known as the minimum expected or required return an investment must offer to be attractive.
"If the firm's ROE is too low, the firm's debt ratio must be too low." True or false? Select one: O a. True O b. False
Select all that are true with respect to the cost of debt. Group of answer choices it is the return the firm needs to earn overall to satisfy all investors It is the rate the debt holders demand given the risk they face as debt holders Can be estimated using CAPM Cannot be estimated using CAPM because CAPM is used for estimating the cost of equity Is always equal to the YTM on a company's existing bonds Is lower than the YTM on a company's existing debt if there is default risk Can be proxied by the YTM on a company's existing debt if the debt is risk free Flag question: Question 7