Answer:
Increase in Return on equity = 10.876%
Explanation:
Given:
Assets = $197,500
Sales = $307,500
Old net income = $19,575
New net income = $33,000
Debt-to-total-assets ratio = 37.5% = 37.5 / 100 = 0.375
Computation of total debt:
Debt-to-total-assets ratio = Debt / Assets
0.375 = Debt / $197,500
Debt = 74,063 (approx)
Equity-to-total-assets ratio = 1 - Debt-to-total-assets ratio
Equity-to-total-assets ratio = 1 - 0.375
Equity-to-total-assets ratio = 0.625
Computation of total Equity:
Equity-to-total-assets ratio = Equity / Assets
0.625 = Equity / $197,500
Equity = $123,438 (approx)
Return on equity = (Net income / Equity) × 100
Return on equity (Old net income) = ($19,575 / $123,438) × 100
Return on equity (Old net income) = 15.858%
Return on equity (New net income) = ($33,000 / $123,438) × 100
Return on equity (New net income) = 26.734%
Increase in Return on equity = 26.734% - 15.858%
Increase in Return on equity = 10.876%
