year Mason Inchad a total assets turnover of 1.33 and an equity multiplier of 1.75 Its sales were $195,000 and its net income was $10,549 The CFO believes that the company could have operated more efficiently, lowered its costs, and increased its net income by $5,250 without changing its sales, assets, or capital structure Had it cut costs and increased its net income in this amount, by how much would the ROE have changed?
A) 5.66%
B) 5.95%
C) 6.27%
D) 6.58%
E) 6.91%

Question

Quizplus · Accepted Answer

ROE = Net income / Shareholders' equity

First, we need to calculate current ROE:
ROE = $10,549 / ($195,000 x 1.75) = 0.034 or 3.4%

Next, we need to calculate the new net income if the company had operated more efficiently:
New net income = $10,549 + $5,250 = $15,799

Then, we can calculate the new ROE:
New ROE = $15,799 / ($195,000 x 1.75) = 0.0537 or 5.37%

Finally, we can calculate the change in ROE:
Change in ROE = New ROE - Current ROE = 5.37% - 3.4% = 1.97% or 0.0197

Therefore, the ROE would have increased by 1.97%, or 6.27% in total (since the current ROE is 3.4%). The correct answer is C.

Year Mason Inchad a Total Assets Turnover of 1