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

question 99

Multiple Choice

The board of directors is dissatisfied with last year's ROE of 15%. If the profit margin and asset turnover ratio remain unchanged at 8% and 1.25, respectively, by how much must the leverage ratio (i.e., assets/equity) increase to achieve 20% ROE?

• A) .50%
• B) 5%
• C) 16.67%
• D)33.33%

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Definitions:

Dividends in Arrears

Dividends on preferred shares that have not been paid in the timeframe originally scheduled.

Cumulative Preferred Stock

A type of preferred stock that entitles its holders to receive dividends that were missed in the past, before any dividends can be issued to common stockholders.

Dividend Amount

The sum of money paid by a company to its shareholders out of its profits.

Preferred Stock

A class of ownership in a corporation with a stated dividend that must be paid before dividends to common stockholders.