Which of the following statements is not correct?

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BlackTom AI · Accepted Answer

Question restatement: The prompt asks which of the following statements is not correct regarding financial metrics and corporate financial decisions.
Option 1: 'Return on common equity may increase even when the financial leverage ratio decreases.' This is plausible because ROE depends on net income and equity. A decrease in leverage could coincide with higher profitability, better margins, or improved efficiency, which might raise NI relative to equity and thus raise ROE despite lower leverage.
Option 2: 'The return on common equity ratio increases when treasury stock is purchased.' When a firm buys back its own shares, it reduces equity (the denominator in ROE = NI / Equity) while NI stays the same (assuming no immediate impact on net income). This tends to push ROE upward, so the statement is consistent with standard ROE mechanics.
Option 3: 'Purchasing fixed assets through debt financing decreases the financial leverage ratio.' Leveraging with debt to acquire fixed assets typically increases financial leverage (debt rises while equity remains unchanged initially), so the leverage ratio would not decrease; it would more likely increase. Therefore this statement is inconsistent with basic leverage dynamics and is not correct.
Option 4: 'Return on common equity increases when the asset turnover increases.' Higher asset turnover means more efficient use of assets to generate sales, which can lift net income relative to equity and thus raise ROE; this aligns with conventional insights into ROE drivers.
In summary, among the four options, the third statement contradicts the typical effect of financing fixed assets with debt on leverage, making it the not-correct option. The other statements describe scenarios that can plausibly lead to higher ROE or higher leverage in accordance with financial principles.

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Which of the following statements is not correct?

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