This year Digby achieved an ROE of 21.4%. Suppose next year the profit margin (Net Income/Sales) decreases. Assuming sales, assets and financial leverage remain the same next year, what effect would you expect this action to have on Digby's ROE?

Select: 1

Digby ROE will increase.

Digby ROE will decrease.

Digby ROE will remain the same.

Question

Business

Koen

17 January, 09:46

This year Digby achieved an ROE of 21.4%. Suppose next year the profit margin (Net Income/Sales) decreases. Assuming sales, assets and financial leverage remain the same next year, what effect would you expect this action to have on Digby's ROE?

Select: 1

Digby ROE will increase.

Digby ROE will decrease.

Digby ROE will remain the same.

+2

Answers (1)

Know the Answer?

Evan Gilmore · Answer 1

Digby ROE will decrease. As profit margin reduces, ROE reduces

Explanation:

The reduction in ROE is due to decrease in profit margin. ROE is the ratio of net income to shareholders' equity. Thus, if net income reduced, profit margin reduces and this brings about a reduction in ROE.