The following summary figures are available for PCM Ltd for the year ended 31 December 2019:

Imagine that you are a shareholder. At the Annual General Meeting, the CEO mentions that she has been talking to a business analyst about improving the financial performance of the company. The analyst suggests increasing debt to $35,000 (keeping equity unchanged). This will allow the company to generate sales of $27,143. Doing so would increase the net operating income to $11,943, thereby increasing the returns for shareholders. However, the interest rate would increase to 15%.

Question：

Assume that there are no taxes. Would you advise the CEO to follow this suggestion?

Explain. Use the advanced Du Pont Model to answer this question.

Answer rating: 100% (QA)

ANS WER No I would not advise the CEO to follow this suggestion Although increasing debt would incre... View the full answer