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Double the ROE

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Austin & Company has a debt ratio of 0.5, a total assets turnover ratio of 0.25, and a profit margin of 10 percent. The Board of Directors is unhappy with the current return on equity (ROE), and they think it could be doubled. This could be accomplished (1) by increasing the profit margin to 12 percent, and (2) by increasing debt utilization. Total assets turnover will not change. What new debt ratio, along with the new 12 percent profit margin, would be required to double the ROE?

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Solution Summary

The solution explains what debt ratio is needed to double the ROE.

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Return on Equity (ROE) = Profit Margin X Asset Turnover X Equity Multiplier
Equity Multiplier = Assets/Equity
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