Change in ROE Formula | Exam Prep CFA Level 1 | Test Prep

Change in ROE Calculation

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Question

If a firm's asset turnover were to increase by 10% and the tax rate were to increase from 35% to 40%, leaving all else constant, the resultant change in the firm's

ROE equals ________.

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Explanations

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A. B. C. D.

C

ROE = Net income/Equity. Using the Extended duPont System, = (EBT/sales)*(sales/total assets)*(total assets/equity)*(1-tax rate) The asset turnover ratio equals sales/total assets. Therefore, ROE(after)/ROE(before) = [asset turnover(after)/asset turnover(before)*]*[0.6/0.65] = 1.1*0.6/0.65 = 1.015. Thus, the ROE increases by 1.5%.

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