Question

Last year Blease Inc had a total assets turnover of 1.33 and an equity multiplier of 1.75. Its sales were $205,000 and its net income was $10,600. The firm finances using only debt and common equity and its total assets equal total invested capital. The CFO believes that the company could have operated more efficiently, lowered its costs, and increased its net income by $10,250 without changing its sales, assets, or capital structure. Had it cut costs and increased its net income by this amount, how much would the ROE have changed? Do not round your intermediate calculations.

Answer 1

Answer:

Had it cut costs and increased its net income by this amount, The ROE would have changed 11.64%.

Explanation:

Old Net profit margin = Net income/ Revenue

                                    = $10,600/$205,000

                                    = 5.170731707%

Old ROE = Net profit margin*Asset turnover*Equity multiplier

              = 0.0517*1.33*1.75

              = 12.03487805%

New net income = $10,600 + $10,250

                            = $20,850

New net profit margin = $20,850/$205,000

                                     = 10.17073171%

New ROE = 0.1017*1.33*1.75  

                = 23.67237805%

Change in ROE = New ROE – Old ROE

                          = 23.67237805%  - 12.03487805%

                           = 11.6375%

Therefore, Had it cut costs and increased its net income by this amount, The ROE would have changed 11.64%.