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 from the current level
D) Decrease the debt burden from its current level

Question

Quizplus · Accepted Answer

Since the leverage ratio already equals 1, decreasing it (option A) would not increase the ROE. Decreasing assets (option C) would decrease the ROA and thus decrease the ROE. Decreasing the debt burden (option D) would decrease the leverage ratio and also decrease the ROE. Therefore, increasing the debt burden from its current level (option B) would be the only guaranteed way to increase the ROE, as it would increase the leverage ratio, which amplifies the ROA's impact on the overall ROE.

Which of the Following Choices Would Be Guaranteed to Increase