00:01
To determine what will decrease when a company uses its cash to pay off some of its debt while maintaining current equity and net income, let's analyze the financial ratios.
00:11
Return on equity or roe is net income to equity.
00:16
Equity multiplier is total assets to equity.
00:19
Return on assets or roa is the net income to total assets.
00:24
Profit margin is net income to sales and total assets turnover is sales to total assets.
00:30
So in this scenario, we're given that the company maintains its current equity and net income while reducing its debt by using cash.
00:38
Since equity is maintained, there is no change in the denominator for roe, the equity, and roa, total assets.
00:46
Also, since net income is maintained, the numerator for roe and roa, which is net income, remains the same.
00:54
So let's consider the impact of using cash to pay off some debt.
00:57
When the company uses cash to pay off debt, total assets decrease because cash is an asset and it's being used to reduce liabilities.
01:07
So in choice a, if that's equal to net income to equity, this would be no change in net income or equity...