Quiz Ch 04 – T/F Klein Cosmetics

Fundamentals of Financial Management, Concise

Brigham and Houston

09th Edition

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True or false: Given Klein Cosmetics' current financial metrics—a 5.0% profit margin, 1.5 times total assets turnover, no debt (equity multiplier of 1.0), and a 7.5% ROE, the CFO proposes borrowing to buy back stock and increasing the equity multiplier to 2.0. Despite the lower profit margin of 4.5% due to interest on the new debt, this strategy is likely to elevate the ROE from 7.5% to 13.5%.

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