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%

Question

Quizplus · Accepted Answer

Last year:ROE = leverage ratio × asset turnover × profit margin.15 = leverage ratio × 1.25 × .08Leverage ratio = 1.5This year:ROE = leverage ratio × asset turnover × profit margin.20 = leverage ratio × 1.25 × .08Leverage ratio = 2Percentage increase = (2 - 1.5)/1.5 = .3333, or 33.33%

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