Question: The Board of Directors of Vintage Apparel, Inc., has been pressuring its CEO to boost ROE. During an interview on CNBC, she announced a plan
The Board of Directors of Vintage Apparel, Inc., has been pressuring its CEO to boost ROE. During an interview on CNBC, she announced a plan to improve the firm’s financial performance. She will raise prices on all of the company’s products by 10 percent. She justifies the plan by observing that ROE can be decomposed into the product of profit margin, asset turnover, and financial leverage. By raising prices, she will increase the profit margin and thus ROE. Does this plan make sense to you? Why or why not?
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