Klein Cosmetics has a profit margin of 5.0%, a total assets turnover ratio of 1.5 times, no debt and therefore an equity multiplier of 1.0, and an ROE of 7.5%. The CFO recommends that the firm borrow money, use the funds to buy back stock, and raise the equity multiplier to 2.0. The size of the firm (assets) would not change. She thinks that operations would not be affected, but interest on the new debt would lower the profit margin to 4.5%. This would probably be a good move, as it would increase the ROE from 7.5% to 13.5%.

A. True
B. False

Magic realm, inc., has developed a new fantasy board game. the company sold 15,000 games last year at a selling price of $20 per game. fixed expenses associated with the game total $182,000 per year, and variable expenses are $6 per game. production of the game is entrusted to a printing contractor. variable expenses consist mostly of payments to this contractor.required: 1-a. prepare a contribution format income statement for the game last year.1-b. compute the degree of operating leverage.2. management is confident that the company can sell 58,880 games next year (an increase of 12,880 games, or 28%, over last year). given this assumption: a. what is the expected percentage increase in net operating income for next year? b. what is the expected amount of net operating income for next year? (do not prepare an income statement; use the degree of operating leverage to compute your answer.)