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 This year Andrews achieved an ROE of

 

This year Andrews achieved an ROE of 16.8%. Suppose the Board of Directors of Andrews mandates that management take measures to increase financial Leverage (=Assets/Equity) next year. Assuming Sales, Profits, and Assets remain the same next year, what effect would you expect this new Leverage policy will have on Andrews ROE?

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Andrews ROE will remain the same.

 

Andrews ROE will increase.

 

Andrews ROE will decrease.

 



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honeyd


11-09-20 | 04:17:18
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to increase leverage assets need to increase and equity reduces. that can only happen if financing is done through the bond. it also means, equity remains the same or decreases. since money is needed to finance assets, it is less likely that the company will buy back stock. whether equity reduces or remains the same, using bond may result to high returns thus increasing ROE
Andrews's ROE will increase.


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