Question

This year Andrews achieved an ROE of 30.2%. Suppose management takes measures that increase Asset turnover (Sales/Total Assets) next year. Assuming Sales, Profits, and financial leverage remain the same, what effect would you expect this action to have on Andrews's ROE

Answer 1

The answer is " Andrews ROE increases."

Step-by-step explanation:

Please find the complete question in the attached file.

Using formula:

`\text{ROE = Profit Margin} ((Profit)/(Sales)) * \text{Total Asset Turnover} ((Sales)/(Assets)) * \text{Equity Multiplier} ((Assets)/(Equity))`

As total asset sales (sales/assets) decline whereas other items remain constant, ROE decreases. Or we could assume that growth of asset turnover would result in increased ROE, culminating in much more sales per unit of asset held by the firm.