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Question - The board of directors of Contemporary Company was unhappy with the current return on common equity. Though the return on sales (profit margin) was impressively good at 12.5 percent, the asset turnover was only 0.75. The present debt ratio is 0.40.
Atty. Tristan, the vice-president of corporate planning, presented a proposal as follows:
Profit margin should be raised to 15 percent.
The new capital structure will be revised by raising debt component.
The asset turnover will be maintained at 0.75.
The proposed adjustment is estimated to raise return on equity by 50 percent.
What debt ratio did Atty. Tristan propose in order to raise the return on equity (ROE) to 150 percent of the present level?
A.0.52
B.0.68
C.0.61
D.0.72
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