Transnational Motors has decided to make an additional investment in its operating assets, which are financed by debt. Assuming all other factors remain constant, this increase in investment will have which of the following effects?

Operating Profit Margin

Total Asset Turnover

Return on Assets

Answer (B) is correct. An additional investment in operating assets that are financed by debt will cause assets and liabilities to increase proportionally. This transaction would have no effect on income statement balances. Therefore, there will be no change in operating profit margin (operating income ÷ sales). Both the total asset turnover (net sales ÷ average total assets) and the return on assets (net income ÷ average total assets) will decrease as the denominator for both of these ratios will increase, but the numerator remains constant.