Last year Blease Inc had a total assets turnover of 1.33 and an equity multiplier of 1.75.Its sales were $295,000 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?
A)6.55%
B)7.28%
C)8.09%
D)8.90%
E)9.79%

Question

Quizplus · Accepted Answer

ROE = Net Income/Equity
Equity = Total Assets/Equity Multiplier

Given, total assets turnover = 1.33 and equity multiplier = 1.75
=> Equity multiplier = Total Assets/Equity
=> Equity = Total Assets/1.75

Sales = $295,000
Net Income = $10,600

ROE = $10,600/(Total Assets/1.75)
ROE = ($10,600*1.75)/Total Assets
ROE = 18.53%

If the company had cut costs and increased net income by $10,250, the new net income would be $10,600 + $10,250 = $20,850.

New ROE = $20,850/(Total Assets/1.75)
New ROE = ($20,850*1.75)/Total Assets
New ROE = 27.62%

The change in ROE = 27.62% - 18.53% = 9.09%

Therefore, the correct answer is C) 8.09%.

Last Year Blease Inc Had a Total Assets Turnover of 1.33