Suppose Novak Company experienced a reduction in its ROE over the last year.This fall could be attributed to
A) an increase in Net Profit Margin.
B) a decrease in Asset Turnover.
C) an increase in Leverage.
D) a decrease in Equity.

Question

Quizplus · Accepted Answer

A reduction in ROE can be caused by a decrease in Asset Turnover. This means that Novak Company is generating less sales revenue per dollar of assets, leading to a lower return on equity. An increase in Net Profit Margin would actually increase ROE, as it means the company is making more profit per dollar of revenue. Similarly, an increase in Leverage would increase ROE, as long as the return on assets exceeds the interest rate on the borrowed funds. Finally, a decrease in Equity would also increase ROE, as long as the return on assets remains constant.

Suppose Novak Company Experienced a Reduction in Its ROE Over