i. Management at a restaurant chain intends to maintain a 40% debt-to-capital ratio.

Management has a track record of meeting its capital structure targets. The restaurant chain is solidly profitable, but earnings are expected to decline 2% annually over the next five years because of increasing competitive pressure. The company does not pay a dividend or repurchase shares, and all earnings are expected to be retained for the next five years. What is most likely to happen to the restaurant chain’s total debt over this period?

A. Total debt will increase.

B. Total debt will decrease.

C. Total debt will remain the same.

ii. Sophie Moreau, a buy-side analyst, is analyzing a French manufacturing company.

Working capital and PP&E account for almost all of the company’s assets. Moreau believes that the depreciation schedule used by the company is not reflective of economic reality. Rather, she expects PP&E to last twice as long as what is implied by the depreciation schedule, and, as such, she projects capital expenditures to be significantly less than depreciation for the next five years. Moreau projects that both earnings and net working capital will grow at a low single-digit rate during this time.

What do Moreau’s assumptions most likely imply for returns on invested capital during the next five years?

A. ROIC will increase.

B. ROIC will decrease.

C. ROIC will stay the same.