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:

Question

Quizplus · Accepted Answer

To keep ROE unchanged, the formula can be rearranged as ROE=profit margin x asset turnover x leverage ratio. If the profit margin decreases from 8% to 6%, and the leverage ratio increases from 1.2 to 1.6, then asset turnover must be adjusted so that the changes in profit margin and leverage cancel each other out. This can be achieved by keeping asset turnover constant, so the correct answer is A) remain constant.

What Must Happen to Asset Turnover to Leave ROE Unchanged