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:

Denominator Level

Refers to the total amount of capacity or activity base used to allocate fixed costs to products or services in cost accounting.

Predetermined Overhead Rate

A rate used to apply manufacturing overhead to products or job orders, calculated at the beginning of a period by dividing estimated overhead costs by an estimated activity base.

Machine-Hours

A measure of production output or work using machines, calculated as the number of machines used multiplied by the hours they operate.

Fixed Overhead Budget Variance

The difference between the actual fixed overhead costs incurred and the budgeted fixed overhead costs.