Question

Bob Evans Corporation’s financial statements ($ millions) … Income Statement Summary
			2016		2017
Sales			$1,799		$2,010
Earnings before interest & taxes
(EBIT)			$221		$304
Interest expense (net)			(7)		(12)
Income before taxes			$214		$292
Income Taxes			(79)		(99)
Tax Rate			37%		34%
Net income			$135		$193
Common shares outstanding
(millions)			38		38
Balance Sheet Summary
	2015		2016		2017
Current assets	$504		$536		$654
Timberland assets	513		508		513
Property, plant & equipment	681		718		827
Other assets	151		34		38
Total assets	$1,849		$1,796		$2,032
Current liabilities	$176		$162		$180
Long-term debt	493		370		530
Deferred taxes & other	136		127		146
Equity	1,044		1,137		1,176
Total liabilities & equity	$1,849		$1,796		$2,032

Bob Evans change in ROE from 2106 to 2017 was negatively impacted by the change in _________________________ .  

a) compound leverage factor

b) profit margins

c) tax rate

d) asset turnover ratio

Answer 1

ROE=Net profit margin*Asset turnover ratio*Compound levergae factor

2016:

Net profit margin=Net income/Sales=135/1799=7.5%

Asset turnover ratio=Sales/(Average Total assets=1799/((1849+1796)/2)=1.0

Compound levergae factor=Average total Assets/Average Equity=((1849+1796)/2)/((1044+1137)/2)=1.67

2017:

Net profit margin=193/2010=9.6%

Asset turnover ratio=2010/((1796+2032)/2)=1.1

Compound levergae factor=((1796+2032)/2)/((1137+1176)/2)=1.65

ROE changes in 2017 negatively due to decrease in Compound levergae factor

Option a is correct