If a firm wishes to retain the same return on equity when its net profit margin and total asset turnover has declined, it must ____.
A) decrease its equity multiplier
B) increase its equity multiplier
C) increase sales and increase assets
D) reduce sales and increase assets

Question

Quizplus · Accepted Answer

To maintain the same return on equity (ROE) when both net profit margin and total asset turnover have declined, a firm must increase its equity multiplier. The equity multiplier is a measure of financial leverage, and increasing it would compensate for the lower efficiency in generating profit and asset utilization, thus helping to sustain the same level of ROE.

If a Firm Wishes to Retain the Same Return on Equity