Assume now that the company believes that if it adopts a restricted policy,its sales will fall by 15% and EBIT will fall by 10%,but its total assets turnover,debt ratio,interest rate,and tax rate will all remain the same.In this situation,what's the difference between the projected ROEs under the restricted and relaxed policies?

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Quizplus · Accepted Answer

The Return on Equity (ROE) is calculated as Net Income / Shareholder's Equity. Under the restricted policy, while sales and EBIT are expected to decrease, the unchanged total assets turnover, debt ratio, interest rate, and tax rate imply that the efficiency in using equity to generate profits remains the same. However, with a 15% decrease in sales and a 10% decrease in EBIT, the net income will also decrease, leading to a lower ROE compared to the relaxed policy. The exact difference in ROE depends on the specific figures, but the decrease in sales and EBIT directly impacts net income, thus affecting ROE.

Assume Now That the Company Believes That If It Adopts