What was the original return on equity (ROE) for this company?  Assuming the president of the firm allows the CFO to increase the debt ratio to 58%, what will be the new ROE’?

The original return on equity (ROE) for this company can be calculated by dividing the net income of a firm by its total shareholder’s equity. The return on equity (ROE) is a key metric for investors as it gives them a better idea of how well – or poorly – staffed enterprises use the available resources. It also helps to decide whether an organization will be worth investing in.

For example , if company X’s net income is $10 million and its total shareholder’s equity is $100 million then ROE would be 10%. For every dollar that shareholders invest in a business, they receive 10 cents of profit.

Now , if president of firm decides increase debt ratio from 50% to 58% then new ROE can be calculated using formula : Net Income/ ((Total Equity + Total Debt) – Total Assets). ROE is 11.77%. With increased leverage, the same money produced higher returns, indicating greater efficiency in managing finances.

Beyond a certain point, increasing leverage can have the opposite effect. Instead of profits rising they could start to decrease. Additional debts will eat up available funds and reduce overall profitability.

In summary, return on equity can give us an insight into the way management utilizes capital structures to maximize profits. However, caution is needed as too much debt could have irreversible effects on business operations over time.