The board of directors is dissatisfied with last year's ROE of 15%.If the operating 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) 0.50%
B) 5%
C) 16.67%
D) 33.33%

Question

Quizplus · Accepted Answer

Last year:ROE = leverage ratio × asset turnover × operating profit margin0.15 = leverage ratio × 1.25 × 0.08Leverage ratio = 1.5This year:ROE = leverage ratio × asset turnover × operating profit margin0.20 = leverage ratio × 1.25 × 0.08Leverage ratio = 2Percentage increase = (2 - 1.5) / 1.5 = 0.3333, or 33.33%

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