How do you double a Rate of Return with following variables? How much new debt?
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A company has a debt ratio of 0.5, total assets turnover of 0.25, and profit margin of 10%. The company wants to double ROE by increasing profit margin to 12%, leaving asset turnover the same, and increasing debt utilization. What new debt ratio, along with the new 12% profit margin, would be required to double the Rate of Return?
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In concise explanations, the solution shows the formulas and the calculations to arrive at the answer. The expert determines what would be required to double a rate of return.
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debt ratio = Debt/Asset = 0.5
Then equity / asset = 1-debt ratio = 0.5,
and asset /equity = 1/0.5 = 2
total assets turnover = Revenue / Asset = 0.25
profit ...
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