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Vadim26 [7]
3 years ago
9

Last year Kruse Corp had $355,000 of assets, $403,000 of sales, $28,250 of net income, and a debt-to-total-assets ratio of 39%.

The new CFO believes the firm has excessive fixed assets and inventory that could be sold, enabling it to reduce its total assets to $252,500. Sales, costs, and net income would not be affected, and the firm would maintain the same debt ratio (but with less total debt). By how much would the reduction in assets improve the ROE?
Business
1 answer:
maksim [4K]3 years ago
6 0

Answer:

It will improve the ROE by 5.29%  to 18.34% from 13.05%

Explanation:

<u>current values</u>

assets 355,000

sales  403,000

net income 28,250

debt to assets = 39%

debt = assets x 39% =  355,00 x .39 = 138,450

equity = assets - debt = 355,000 - 138,450 = 216,550

<u>Current ROE</u>

net income / own funds (equity)

28,250/216,500 = 0,1304849 = 13.05%

<u>With the proposition of reducing assets to 252,500</u>

debt = assets x 39% =  252,500 x .39 = 98,475

equity = assets - debt = 252,500 - 98,475 = 154,025‬

<u>proposition expected ROE</u>

28,250/154,025 = 0,183411783 = 18.34%

<em>Change in ROE 18.34 - 13.05 = 5.29</em>

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