The board of directors of Mystery Entertainment, Inc., wants the CEO to boost return on equity (ROE). During a recent interview, they announced their plan to improve the firm’s financial performance. They will raise the prices on all of the company’s products by 10%. They justify the plan by observing that ROE can be decomposed into the product of profit margin, asset turnover, and financial leverage. By raising prices, it is believed this will increase the profit margin and thus ROE. Is this reasonable? Explain your answer.
The board of directors of Mystery Entertainment, Inc., wants the CEO to boost return on equity (ROE). During a recent interview, they announced their plan to improve the firm’s financial performance. They will raise the prices on all of the company’s products by 10%. They justify the plan by observing that ROE can be decomposed into the product of profit margin, asset turnover, and financial leverage. By raising prices, it is believed this will increase the profit margin and thus ROE. Is this reasonable? Explain your answer.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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