Holding other things equal, an increase in net income will
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A. B. C. D.C
An increase in net income increases the return on equity ratio (ROE), which would increase the growth rate of earnings and dividends. This, in turn, would increase the earnings multiplier.
In order to understand the impact of an increase in net income on the return on equity (ROE) and earnings multiplier, let's break down each answer choice and analyze its implications:
A. Decrease the ROE: Return on equity (ROE) is a financial ratio that measures a company's profitability by calculating the return generated on shareholders' equity. It is calculated by dividing net income by shareholders' equity. If net income increases while other factors remain constant, it means the company is generating more profit. Consequently, if net income increases and shareholders' equity remains the same, the ROE will increase, not decrease. Therefore, this answer choice is incorrect.
B. Have no effect on the ROE: As mentioned earlier, an increase in net income, while other factors remain the same, will lead to a higher return on equity (ROE). Therefore, this answer choice is incorrect.
C. Increase the earnings multiplier: The earnings multiplier is not a commonly used financial term or ratio. It is unclear what is meant by "earnings multiplier" in this context. Without further clarification or definition of the term, it is challenging to provide a precise explanation. However, it is worth noting that the earnings multiplier is typically associated with valuation ratios such as the price-to-earnings (P/E) ratio. The P/E ratio compares a company's stock price to its earnings per share (EPS). An increase in net income could potentially increase the EPS, which might affect the P/E ratio and, in turn, impact the valuation of the company's stock. However, since the question does not provide sufficient information or context about the earnings multiplier, it is difficult to determine the precise impact. Therefore, this answer choice is questionable.
D. Have no effect on the earnings multiplier: Without a clear definition or understanding of the term "earnings multiplier," it is impossible to determine the effect of an increase in net income on this ratio. As mentioned earlier, if the term refers to a valuation ratio like the P/E ratio, an increase in net income could potentially affect it. However, since the question does not provide enough information, this answer choice remains uncertain.
In summary, based on the information given and the understanding of financial concepts, the most accurate answer would be either B (have no effect on the ROE) or D (have no effect on the earnings multiplier) due to the lack of context and definitions for the terms used in the question.