Inchworm Construction Equipment Company maintains a very large investment in plant and equipment assets. Given the size of this investment, the firm experiences very low fixed asset turnover and the lowest asset intensity among its competitors. In order to compensate for this and earn an adequate return on equity, the company must:

Question

Quizplus · Accepted Answer

Given the low fixed asset turnover and high asset intensity, Inchworm Construction Equipment Company needs to either earn a large profit margin or employ a high degree of leverage to ensure an adequate return on equity. This approach compensates for the lower efficiency in using its assets by either increasing the profit per unit of sale or by amplifying returns through borrowing.

Inchworm Construction Equipment Company Maintains a Very Large Investment in Plant