This year Andrews achieved an ROE of 18.4%. Suppose next year the profit margin

Question

This year Andrews achieved an ROE of 18.4%. Suppose next year the profit margin (Net Income/Sales) decreases. Assuming sales, assets and financial leverage remain the same next year, what effect would you expect this action to have on Andrews's ROE? Select: 1 Andrews ROE will decrease. Andrews ROE will increase. Andrews ROE will remain the same. This year Andrews achieved an ROE of 18.4%. Suppose next year the profit margin (Net Income/Sales) decreases. Assuming sales, assets and financial leverage remain the same next year, what effect would you expect this action to have on Andrews's ROE? Select: 1 Andrews ROE will decrease. Andrews ROE will increase. Andrews ROE will remain the same.

Explanation / Answer

Return on equity is amount of net income returned as a percentage of shareholder equity . Since it is mentioned that leverage amount will not change next year and leverage is ratio of debt vs equity , we presume quantum of equity remains unchanged.

It is mentioned that next year profit margin reduces .

Therefore , we have a scenario of profit margin reducing with equity amount remaining unchanged. Therefore , ROE which is equal to Net profit / Equity will also decrease .

ANDREWS ROE WILL DECREASE

ANDREWS ROE WILL DECREASE

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