The Board of Directors Is Dissatisfied with Last Year's ROE

question 115

Multiple Choice

The board of directors is dissatisfied with last year's ROE of 15 percent.If the profit margin and asset turnover remain unchanged at 8 percent and 1.25 respectively, by how much must the total debt ratio increase to achieve 20 percent ROE?

• A)Total debt ratio must increase by .5
• B)Total debt ratio must increase by 5
• C)Total debt ratio must increase by 5 percent
• D)Total debt ratio must increase by 16.67 percent Last Year:
• ROE = .15 = Profit margin x Asset turnover x leverage rate
• = )08 x 1.25 x 1.5
• This Year:
• ROE = .20 = .08 x 1.25 x?

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Definitions:

Rate of Growth

The pace at which a company, economy, or investment increases in size or value over a specific period.

Constant Dividends

A fixed amount of dividend that a company pays out to its shareholders regularly, typically annually.

Date of Payment

The specific day on which a financial obligation must be paid, such as the date dividends are distributed to shareholders.

Dividend Payment

A financial distribution by a corporation to its shareholders, typically from the company's earnings.