Final answer:
Increasing financial leverage affects the retailer's return on net worth (RONW), not ROA. Without the initial RONW, we cannot provide an exact answer. However, based on the information given and standard financial formulas, none of the provided options are correct.
Step-by-step explanation:
If a retailer increases its financial leverage ratio from 1.5 times to 2.0 times with an ROA of 7.0 percent, it impacts its return on net worth (RONW) or equity, not its ROA directly. Financial leverage increases the proportion of debt in the company's capital structure, thus potentially increasing the return on equity if the cost of debt is lower than the return on assets (ROA). To calculate the change in RONW, one would usually use the formula RONW = ROA × (1 + Debt-to-Equity ratio). However, without knowing the retailer's initial RONW, we cannot determine the exact new RONW.
Option 1 is incorrect because increasing financial leverage does not change ROA, which is based on assets, not equity. Options 2 and 4 do not reflect typical outcomes of increased financial leverage. Option 5 implies an incorrect 1:1 increase in RONW with leverage. Thus, if we assume the initial Debt-to-Equity ratio is 1.5, and the retailer's RONW was initially ROA × (1 + D/E ratio), then initially RONW = 7% × (1 + 1.5) = 7% × 2.5 = 17.5%. If the leverage ratio increases to 2, the new RONW would be 7% × (1 + 2) = 7% × 3 = 21%. This is a change from 17.5% to 21%, not an increase by 10.5 percentage points. As such, none of the given answer choices are correct based on the information provided and standard financial formulas.