This year achieved an ROE of 5.3%. Suppose next year the profit margin (Net Income/Sales) increases. Assuming sales, assets and financial leverage remain the same next year, what effect would you expect this action to have on Andrews's ROE?

Andrews's ROE will increase.

Explanation:

Beacause profit margin is the ratio of Net income to sales, the Increase in Profit margin as the sales will be constat will result in the increase in net income.

As the assets and Financial leverage of Andrew reamin the same, resultantly there is no change in the Andrews's equity. ROE is the ratio of Net income to Equity of the company, so increase in net income with constant equity will increase the Return on Equity ratio.

The expected effect the action would have on Andrews's ROE is to increase it.

Explanation:

Return on equity (ROE) can be described financial performance measure estimated by dividing net income by shareholders' equity. That is;

ROE = Net income/Equity shareholding

The assumption in the question that next year, the profit margin (Net Income/Sales) increases while sales, assets and financial leverage will remain constant during the same period implies that only net income will increase among the listed variables.

As net income will increase while other variables including equity remain constant, it therefore implies that ROE will also rise.

Therefore, the expected effect the action would have on Andrews's ROE is to increase it.

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