You observe that a firm's ROE has increased from the previous year, but both its profit margin and equity multiplier are below the previous year's levels. Which of the following statements is CORRECT?
A) Its total assets turnover must be higher than the previous year.
B) Its return on assets must be lower than the previous year.
C) Its TIE ratio must be higher than the previous year.
D) Its total assets turnover must be lower than the previous year.

Question

Quizplus · Accepted Answer

ROE is calculated by multiplying profit margin, equity multiplier, and total assets turnover. If ROE has increased, one of these components must have increased. Since profit margin and equity multiplier are both lower, the only possibility is that total assets turnover has increased. Therefore, choice A is the correct answer. Choices B, C, and D are incorrect because there is not enough information to make those determinations.

You Observe That a Firm's ROE Has Increased from the Previous