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) Leverage ratio must increase by .5.
B) Leverage ratio must increase by 5.
C) Leverage ratio must increase by 16.67%.
D) Leverage ratio must increase by 33.3%.

Question

Quizplus · Accepted Answer

To achieve a 20% ROE with a profit margin of 8% and asset turnover of 1.25, the leverage ratio must increase by 33.3%. The current ROE is calculated as 8% * 1.25 * leverage ratio = 15%. To achieve 20% ROE, the leverage ratio must be 20% / (8% * 1.25) = 2.0, which is a 33.3% increase from the current leverage ratio of 1.5.

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