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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

If a firm’s ROE is low and management wants to improve it, explain how using more debt might help.

Summary Introduction

To identify: The way to improve the return on equity, using more debt.

Introduction:

DuPont Analysis: Under DuPont analysis, return on equity can be calculated as a product of profit margin, total assets turnover and equity multiplier.

Explanation
  • More debt means less equity which increases the equity multiplier. Therefore, return on equity also increases.
  • Formula to calculate equity multiplier:

Equitymultiplier=TotalassetsEquity

  • As per DuPont equation: Formula to ca

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