All else constant, an increase in which of the following must increase the return on equity?

Question

BlackTom AI · Accepted Answer

To assess how return on equity (ROE) responds to changes, we recall the DuPont decomposition: ROE = Profit Margin × Asset Turnover × Equity Multiplier. The equity multiplier is a measure of financial leverage, and asset turnover captures how efficiently assets generate sales. With all else constant, increases in either asset turnover or leverage (as reflected by the equity multiplier or debt-to-equity ratio) can raise ROE, while changes that involve equity or cash flow without increasing net income or leverage may not.

Option 1: "Total assets and sales". Increasing total assets or sales by themselves does not guarantee a higher ROE if the profitability and leverage remain unchanged. If sales rise but profit margin remains the same and assets are funded evenly (no change in leverage), ROE may stay the same or move in ways not guaranteed to rise. This option mixes variables that do not directly map to a guaranteed ROE increase under the “all else constant” condition.

Option 2: "Debt-equity ratio and total debt". A higher debt-equity ratio implies more leverage, which can increase the equity multiplier and thus ROE, provided net income and asset utilization do not deteriorate. However, simply stating higher debt and leverage without confirming that net income or efficiency do not decline leaves some risk; in constrained scenarios, higher debt could depress ROE if returns do not cover the cost of debt. The implication is not as direct as the combination in Option 5.

Option 3: "Net income and total equity". Increasing net income would raise ROE directly, but increasing total equity (with net income held constant) could reduce ROE since ROE = NI / Equity. Unless net income rises proportionally with equity, ROE would not necessarily increase. This option includes a counteracting pair, making the net effect less certain.

Option 4: "Equity multiplier and total equity". Elevating the equity multiplier (more leverage) can raise ROE if returns on assets exceed the cost of debt and if profitability remains stable. However, increasing total equity tends to dilute ROE unless net income grows at a sufficient rate. The combination here is not guaranteed to increase ROE under all-else-constant assumptions, since the higher equity can offset the leverage benefit.

Option 5: "Total asset turnover and debt-equity ratio". This pair directly aligns with the DuPont framework: higher asset turnover increases the rate at which assets generate sales, boosting ROE through the Asset Turnover term, and a higher debt-equity ratio increases leverage, boosting the Equity Multiplier term. When both are increased while profitability and other factors remain constant, ROE is most consistently driven higher. The two components reinforce each other to lift ROE in a straightforward, predictable manner.

FA25-BL-BUS-F307-1134 Practice Question Set: Final Exam- Requires Respondus LockDown Browser

All else constant, an increase in which of the following must increase the return on equity?

查看解析

登录即可查看完整答案

类似问题

Which of the following statements is not correct?

CANADIAN TIRE- Part 2 of 11 Use two decimal points. Do not add percentage (%), or times (X) with the number. If ROE is 15.149%, enter 15.15. Similarly, if the answer is 0.073, write as 7.3, and if answer is 0.032, write as 3.2. Calculate Return on Equity in percentage (%) for 2020

After restructuring, what is the expected return on Dyson's equity?

Before restructuring, what is the expected return on Dyson's equity?

Calculate GreenTech’s Return on Equity. Note: Round to two decimal places and provide your answer in percent without the unit sign, i.e., X,XXX.XX.

更多留学生实用工具

考试浏览器助手

风格化写作助手

论文查重助手

文献引用助手

课堂转译助手

课堂笔记助手

Quiz搜索助手

学校历年真题

智能刷题助手

智能匹配练习

希望你的学习变得更简单