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In: Finance

Which equation did we use to explain this concept?

According to the Warren Buffett strategy , “Companies can increase their return on equity by increasing their long-term debt-to-equity ratio. Buffett is aware of this, but the idea of adding a couple of points to Berkshire Hathaway's return on equity simply by taking on more debt does not impress him.”

Which equation did we use to explain this concept? You do not have to explain anything. Just type out the equation.  



Solutions

Expert Solution

Return on equity=profit margin*asset turnover ratio*equity multiplier

Equity multiplier=total assets/total equity

If debt increases in capital structure, the equity falls and equity multiplier ratio increases results in increase in the Return on equity.

jeff jeffy answered 2 years ago
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