Increasing Return on Investment
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Return on investment (ROI) can be directly increased by:
a. Decreasing operating income
b. Increasing the minimum desired rate of return (i.e., divisional cost of capital)
c. Increasing sales
d. Decreasing operating assets
e. Decreasing asset turnover (AT)
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Solution Summary
This solution defines return on investment directly and using the DuPont formula. It then determines the effect on return on investment from five different actions using mathematical illustrations.
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The correct answer is d. Decreasing operating assets. Here is why:
Return on investment = Operating income/Operating assets
In order to illustrate why each answer is right or wrong, let's say that operating income is $500 and operating assets totals $2,000. Return on investment = $500/$2,000, or 25%. Let's also break the return on investment this way:
Return on investment = Operating ...
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