Answer:
change in capital to Improvement in ROE = 2.518%
Step-by-step explanation:
To calculate the improvement in ROE, calculate ROE for current capital structure by using DuPont analysis.
where
Return on Assets = Net Income / Total Assets
Equity Multiplier = Total Assets / Equity
Equity = Total assets x (1 – debt to capital ratio)
= $250,000 x (1-37%)
= $157,500
Equity Multiplier = Total Assets / Equity
ROE =0.075 x 1.58 = 0.11904761 or 11.905%
ROE after change in capital structure:
Equity = Total assets x (1 – debt to capital ratio)
= $250,000 x (1-48%) = $130,000
ROE = (18,750/250,000) x (250,000/130,000)
= 0.1442307692307692 or 14.423%
change in capital to Improvement in ROE = 14.423% - 11.905% = 2.518%