A firm with a low return on total assets can improve its return on equity, all else remaining the same, by ________.
A) increasing its debt ratio
B) increasing its total asset turnover
C) decreasing its debt ratio
D) decreasing its total asset turnover

Question

Quizplus · Accepted Answer

By increasing its debt ratio, the firm can increase its financial leverage, which will increase its return on equity. This is because a higher debt ratio means the firm is using more debt to finance its operations and investments, which will amplify its returns if those investments are profitable. However, increasing debt also increases financial risk, so the firm must be careful not to take on too much debt that it cannot service.

A Firm with a Low Return on Total Assets Can