Question

An increase in which of the following must increase the return on equity, all else constant?

A. Total assets and sales
B. Net income and total equity
C. Total asset turnover and debt-equity ratio
D. Equity multiplier and total equity
E. Debt-equity ratio and total debt

Answer 1

An increase in net income or a decrease in total equity will lead to an increase in the return on equity, assuming all other factors remain constant.

Step-by-step explanation:

The question pertains to the factors that would increase the return on equity (ROE) if all other factors remain constant. The answer is Net income and total equity. Return on equity is calculated as Net Income divided by Shareholder's Equity. An increase in net income, all else being equal, will increase the numerator of this ratio, leading to a higher ROE. Alternatively, a decrease in total equity, through dividends or share buybacks, for example, will decrease the denominator, also leading to a higher ROE, given that net income remains unchanged.