Business, 15.07.2020 02:01 eliseeimbody

The DuPont equation provides information about how operations affect the ROE, but the equation does not include the effects of debt on the ROE. b. Suppose a firm’s total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%. The firm finances using only debt and common equity, and total assets equal total invested capital. Under these conditions, the ROE will increase. c. Suppose a firm’s total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%. The firm finances using only debt and common equity, and total assets equal total invested capital. Without additional information, we cannot tell what will happen to the ROE. d. Other things held constant, an increase in the total debt to total capital ratio will result in an increase in the profit margin. e. Suppose a firm’s total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10%and its debt increases from 40% of total assets to 60%. The firm finances using only debt and common equity, and total assets equal total invested capital. Under these conditions, the ROE will decrease.

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