Last year Blease Inc had a total assets turnover of 1.33 and an equity multiplier of 1.75.Its sales were $285,000 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? Do not round your intermediate calculations.
A) 6.95%
B) 9.54%
C) 9.71%
D) 10.13%
E) 8.37%

Question

Quizplus · Accepted Answer

The Return on Equity (ROE) can be calculated using the formula: ROE = Net Income / Equity. With an equity multiplier of 1.75, we can find Equity = Total Assets / Equity Multiplier. Given that Total Assets = Sales / Total Assets Turnover, we can calculate the initial and revised ROE and then find the change.Initial Net Income = $10,600Additional Net Income = $10,250Revised Net Income = $10,600 + $10,250 = $20,850Total Assets = Sales / Total Assets Turnover = $285,000 / 1.33 ≈ $214,286Equity = Total Assets / Equity Multiplier = $214,286 / 1.75 ≈ $122,450Initial ROE = Initial Net Income / Equity = $10,600 / $122,450 ≈ 8.66%Revised ROE = Revised Net Income / Equity = $20,850 / $122,450 ≈ 17.03%Change in ROE = Revised ROE - Initial ROE ≈ 17.03% - 8.66% ≈ 8.37%

Last Year Blease Inc Had a Total Assets Turnover of 1.33