Suppose the margin of 0.2 stayed the same and the turnover ratio of 4.0 increased by 10%. What would be the effect on the ROI?
A) It would decrease by 10%.
B) It would remain the same.
C) It would increase by 10%.
D) It would increase by 15%.

Question

Quizplus · Accepted Answer

ROI formula is ROI = Margin x Turnover Ratio.
Given that Margin = 0.2 and Turnover Ratio = 4.0, so initial ROI = 0.2 x 4.0 = 0.8 or 80%.
If Turnover Ratio increased by 10%, then new Turnover Ratio = 4.0 + (10% of 4.0) = 4.4.
Now, the new ROI = Margin x New Turnover Ratio = 0.2 x 4.4 = 0.88 or 88%.
Hence, the ROI would increase by 10% from the initial ROI of 80%.

Suppose the Margin of 0