Asked by George Khoury on Apr 28, 2024
Verified
Holding all other variables constant, which of the following would increase return on equity? An increase in ____.
A) the tax rate
B) the equity ratio (equity/total assets)
C) total assets
D) total asset turnover
Return on Equity
Return on Equity (ROE) measures the rate of return that the owners of common stock of a company receive on their shareholdings, reflecting the efficiency with which their capital is utilized.
Equity Ratio
A financial ratio indicating the relative proportion of shareholders' equity used to finance a company's assets.
Total Asset Turnover
A financial metric that measures a company's efficiency in using its assets to generate revenue.
- Acknowledge the relevance of financial ratios in appraising a business entity's performance and financial condition.
- Comprehend the importance of timing and management decisions on financial metrics and performance evaluations.
Verified Answer
MJ
Makalinn Jenks STUDENTMay 03, 2024
Final Answer :
D
Explanation :
Total asset turnover is the ratio of sales to total assets, which measures how efficiently a company is using its assets to generate revenue. An increase in total asset turnover would increase return on equity as it would generate more revenue for a given amount of equity. Increasing the tax rate would decrease return on equity, while increasing the equity ratio and total assets would have a mixed effect on return on equity as they would increase the amount of equity and total assets, respectively, but also potentially lower asset turnover.
Learning Objectives
- Acknowledge the relevance of financial ratios in appraising a business entity's performance and financial condition.
- Comprehend the importance of timing and management decisions on financial metrics and performance evaluations.