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

question 38

Multiple Choice

The board of directors is dissatisfied with last year's ROE of 15%.If the operating 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) 0.50%
• B) 5%
• C) 16.67%
• D) 33.33%

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Definitions:

Equity

represents ownership interest in a company or property, often manifested as stock or shares, indicating a stake in the company's assets and profits.

Credit Purchases

Transactions where goods or services are bought using credit rather than paying with cash or check at the time of purchase.

Compound Leverage Ratio

The measure of the level of leverage in a company's capital structure, combining both debt and equity, and its potential effects on the company's returns.

Operating ROA

Operating Return on Assets is a financial metric that measures how efficiently a company can manage its assets to generate earnings.