If a firm decreases its operating costs, all else constant, then:
A) The profit margin increases while the return on equity decreases.
B) The return on assets increases while the return on equity decreases.
C) The total asset turnover rate decreases while the profit margin increases.
D) Both the profit margin and the equity multiplier increase.
E) Both the return on assets and the return on equity increase.

Question

Quizplus · Accepted Answer

Decreasing operating costs, all else constant, directly increases profitability, which in turn enhances both the return on assets (ROA) and the return on equity (ROE). ROA is improved because it measures how efficiently a company can manage its assets to produce profits, and lower costs directly contribute to higher profits. ROE is enhanced because it indicates how effectively a company uses equity financing to generate profits, and again, lower costs increase those profits.

If a Firm Decreases Its Operating Costs, All Else Constant