Ratio analysis Answer: c Diff: M N

19. Drysdale Financial Company and Commerce Financial Company have the same total
assets, the same total assets turnover, and the same return on equity.
However, Drysdale has a higher return on assets than Commerce. Which of the
following can explain these ratios?

a. Drysdale has a higher profit margin and a higher debt ratio than
Commerce.
b. Drysdale has a lower profit margin and a lower debt ratio than Commerce.
c. Drysdale has a higher profit margin and a lower debt ratio than
Commerce.
d. Drysdale has lower net income but more common equity than Commerce.
e. Drysdale has a lower price earnings ratio than Commerce.

Chapter 3 - Page 5
Ratio analysis Answer: a Diff: M
20. You are an analyst following two companies, Company X and Company Y. You have
collected the following information:

 The two companies have the same total assets.

 Company X has a higher total assets turnover than Company Y. 
Company X has a higher profit margin than Company Y.
 Company Y has a higher inventory turnover ratio than Company X. 
Company Y has a higher current ratio than Company X.

Which of the following statements is most correct?

a. Company X must have a higher net income.

b. Company X must have a higher ROE.
c. Company Y must have a higher ROA.
d. Statements a and b are correct.
e. Statements a and c are correct.

Effects of leverage Answer: a Diff: M 21. Which of the following statements is most correct?

a. A firm with financial leverage has a larger equity multiplier than an

otherwise identical firm with no debt in its capital structure. b. The use
of debt in a company’s capital structure results in tax benefits to the
investors who purchase the company’s bonds.
c. All else equal, a firm with a higher debt ratio will have a lower basic
earning power ratio.
d. All of the statements above are correct.
e. Statements a and c are correct.