Which of the following choices would be guaranteed to increase a firm's ROE if the ROA is currently 10% and the leverage ratio equals 1?
A)decrease the leverage ratio.
B)increase the debt burden from its current level.
C)decrease assets turnover from the current level.
D)decrease the debt burden from its current level.

Question

Quizplus · Accepted Answer

ROE = ROA * Leverage Ratio
Since the ROA is fixed at 10%, the only way to increase the ROE is to increase the leverage ratio. Therefore, option B is the correct answer as it suggests increasing the debt burden from its current level, which would increase the leverage ratio and consequently increase the ROE. The other options would either have no effect on ROE or would decrease it.

Which of the Following Choices Would Be Guaranteed to Increase