Question

2) Which one of the following will increase the Return on Equity (ROE)?

a) increase in the corporate tax rate

b) increase in variable cost per unit

c) decrease in net sales

d) issuance of debt to purchase equipment e) decrease in fixed costs

Answer 1

Option e) is correct

A decrease in fixed assets will increase the Return on Equity (ROE) all else being equal.

ROE = Net Income/Total Equity

A decrease in fixed assets will increase the net income and hence will increase the ROE.

Option a) is incorrect because increase in corporate will decrease net income and hence will decrease ROE

Option b) is incorrect because increase in variable cost per unit will decrease net income and hence will decrease ROE

Option c) is incorrect because decrease in net sales will decrease net income and hence will decrease ROE

Option d) is incorrect because issuance of debt will increase interest expensed and decrease net income. So, ROE will decrease