Ask Question
2 February, 17:43

Klein Cosmetics has a profit margin of 5.0%, a total assets turnover ratio of 1.5 times, a zero debt ratio and therefore an equity multiplier of 1.0, and an ROE of 7.5%. The CFO recommends that the firm borrow money, use it to buy back stock, and raise the debt ratio to 50% and the equity multiplier to 2.0. 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%.

+1
Answers (1)
  1. 2 February, 20:53
    0
    It is true that this change would probably be a good move, as it would increase the ROE from 7.5% to 13.5%.

    Explanation:

    Equity multiplier is calculated by dividing the total assets of a company to shareholder's equity of an organization. If a company has not raised any debt, then such company would be having equity multiplier equal to 1. t is a leverage ratio.

    Return on equity is another financial measure to calculate the return. It is calculated by dividing the net income of a company to the shareholder's equity. It directly shows the amount that a company is earning on its money invested by the equity shareholders.
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, a zero debt ratio and therefore an equity ...” in 📘 Business if you're in doubt about the correctness of the answers or there's no answer, then try to use the smart search and find answers to the similar questions.
Search for Other Answers