Final answer:
The correct answer is B. Decrease; negative impact on financial stability, as increased liabilities and decreased equity usually mean a company is taking on more debt relative to its assets, indicating a potentially less stable financial condition, despite any increase in ROI.
Step-by-step explanation:
The student is asking about the effects on Return on Investment (ROI) and the debt ratio when certain financial metrics change. Specifically, the question refers to a scenario where profit remains constant, liabilities increase, and owners' equity (OE) decreases. The correct answer to this is B. Decrease; negative impact on financial stability. When liabilities increase, if profits stay the same, there is a higher amount of debt relative to the equity, which results in an increase in the debt ratio, indicating a more leveraged (and potentially less stable) company. Since the ROI formula involves both net income (which remains unchanged) and shareholders' equity (which decreases), the ROI will increase as there is less equity over which to spread the same amount of profit, indicating a higher rate of return for the remaining equity investment.
However, despite the ROI possibly increasing, this may not necessarily have a positive impact on the company's long-term financial health, as it could indicate that the company is taking on more debt and lowering its financial stability.
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