What must happen to asset turnover to leave ROE unchanged from its original 16% level if the profit margin is reduced from 8% to 6% and the leverage ratio increases from 1.2 to 1.6? Asset turnover must:
A) remain constant.
B) increase from 1.46 to 2.33.
C) decrease from 1.74 to 1.67.
D)increase from 1.38 to 1.67.

Question

Quizplus · Accepted Answer

Original:ROE = leverage ratio × asset turnover × profit margin.16 = 1.2 × asset turnover × .08Asset turnover = 1.67New:.16 = 1.6 × asset turnover × .06Asset turnover = 1.67

What Must Happen to Asset Turnover to Leave ROE Unchanged