Ask Question
4 December, 21:43

Klein Cosmetics has a profit margin of 5.0%, a total assets turnover ratio of 1.5 times, no debt and therefore an equity multiplier of 1.0, and an ROE of 7.5%. The CFO recommends that the firm borrow money, use the funds to buy back stock, and raise the equity multiplier to 2.0. The size of the firm (assets) would not change. She thinks that operations would not be affected, but interest on the new debt would lower the profit margin to 4.5%. This would probably be a good move, as it would increase the ROE from 7.5% to 13.5%.

A. True

B. False

+4
Answers (1)
  1. 4 December, 21:54
    0
    A. True

    Explanation:

    the net profit will drop for 0.05 to 0.045

    but the as the equity multiplier increase to 2 this means equity finance 50% of the company thus, the return on equity will be of:

    Assets turnover x profit margin = 0.0675

    that is the return on assets.

    but equity present half the assets thus, the multiplier is 2

    return on assets x equity multiplier = return on equity

    0,0675 x 2 =.135 = 13.5%

    This makes the statemnt true, the comapny will benefit from taking debt as will increase the return on the stockholders which is the goal for a good management.
Know the Answer?
Not Sure About the Answer?
Find an answer to your question 👍 “Klein Cosmetics has a profit margin of 5.0%, a total assets turnover ratio of 1.5 times, no debt and therefore an equity multiplier of 1.0, ...” in 📗 Business if the answers seem to be not correct or there’s no answer. Try a smart search to find answers to similar questions.
Search for Other Answers