Which one of the following options is usually an appealing way to try to increase a company's Return on Equity (ROE)?

• A. Increase equity by issuing more shares without increasing net income
• B. Increase net income while keeping equity constant
• C. Decrease total assets while keeping net income constant
• D. Reduce sales revenue while keeping expenses constant

Answer: (B)

Verified step by step guidance

1. Understand the concept of Return on Equity (ROE). ROE is a financial ratio that measures a company's profitability relative to shareholders' equity. The formula for ROE is: $\frac{\mathrm{Net Income}}{\mathrm{Shareholders\text{'} Equity}}$. It indicates how effectively a company is using its equity to generate profits.
2. Analyze the impact of increasing equity by issuing more shares without increasing net income. If equity increases while net income remains constant, the denominator of the ROE formula increases, leading to a lower ROE. This option is not appealing for improving ROE.
3. Evaluate the option of increasing net income while keeping equity constant. If net income increases and equity remains unchanged, the numerator of the ROE formula increases, resulting in a higher ROE. This is an effective way to improve ROE.
4. Consider the option of decreasing total assets while keeping net income constant. While reducing total assets might improve efficiency, it does not directly impact the ROE formula unless it affects net income or equity. This option is less relevant for improving ROE directly.
5. Assess the option of reducing sales revenue while keeping expenses constant. If sales revenue decreases while expenses remain unchanged, net income is likely to decrease, which would lower ROE. This option is not appealing for improving ROE.