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solmaris [256]
3 years ago
12

Last year, Candle Corp had $200,000 of assets, $300,000 of sales, $20,000 of net income, and a debt-to-total-assets ratio of 40%

. The new CFO believes a new computer program will enable it to reduce costs and thus raise net income to $30,000. Assets, sales, and the debt ratio would not be affected. By how much would the cost reduction improve the ROE?
Business
1 answer:
Arisa [49]3 years ago
5 0

Answer: 342,000

Explanation:

200,000 + 300,000 + 20,000 = 520,000

520,000 * 40% = 208,000

520,000 - 208,000 = 312,000

312,000 + 30,000 = 342,000

Therefor your answer is 342,000

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Answer:

Explanation:

The cost of equity can be estimated using two (2) different models:

  1. <em>The Dividend Valuation Model</em>
  2. <em>The capital asset pricing model (CAPM)</em>

<em>The Dividend Valuation Model(DVM) is a technique used to value the worth of an asset. According to this model, the value of an asset is the sum of the present values of the future cash flows would that arise from the asset discounted at the required rate of return.  </em>

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P = D(1+g)/ke-g)  

<em>The capital asset pricing model (CAPM): relates the price of a share to the market risk or systematic risk. The systematic risk is that which affects all the all the economic agents, e.g inflation, interest rate e.t.c </em>

<em>This model is considered superior to DVM. Hence, we will use the CAPM</em>

Using the CAPM , the expected return on a asset is given as follows:

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E(r) =? , Rf- 2.86%, Rm-Rf - 7.00 β- 1.23

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A proxy is a group of shareholder activists who attempt at enacting a particular change within the company. Proxy fights occur because proxies often meet resistance from the firm's current board.

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In general terms, boards and managers tend to like debt because they represent the chance of leveraging the company, and a high leverage can increase returns to shareholders by a large margin if the economic performance of the firm is good.

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