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      Question

      Which of the following statements is

      correct?
      A A low receivables turnover ratio is desirable. Correct Answer Incorrect Answer
      B An increase in net profit margin with no change in sales or assets indicates poor ROI. Correct Answer Incorrect Answer
      C A higher tax rate for a firm lowers its interest coverage ratio. Correct Answer Incorrect Answer
      D A lower total debt-to-equity ratio reduces the financial risk of a firm. Correct Answer Incorrect Answer
      E All of the above are correct Correct Answer Incorrect Answer

      Solution

      • Receivables turnover ratio → A higher ratio is desirable as it indicates efficient collection of receivables. Hence, (A) is incorrect. • Net profit margin increase with constant sales/assets → This would improve ROI, not reduce it. Hence, (B) is incorrect. • Interest coverage ratio is calculated as EBIT ÷ Interest Expense. It is unaffected by the tax rate, so (C) is incorrect. • Debt-to-equity ratio → A lower ratio shows that the firm is less dependent on debt financing and relies more on equity. This reduces the risk of financial distress, making (D) correct.

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