year Altman Corp.had $205,000 of assets, $303,500 of sales, $18,250 of net income, and a debt-to-total-assets ratio of 41%.The new CFO believes the firm has excessive fixed assets and inventory that could be sold, enabling it to reduce its total assets to $152,500.Sales, costs, and net income would not be affected, and the firm would maintain the 41% debt ratio.By how much would the reduction in assets improve the ROE?
A)4.69%
B)4.93%
C)5.19%
D)5.45%
E)5.73%

Question

Quizplus · Accepted Answer

The reduction in assets would increase the equity since the debt ratio remains the same. The new equity would be $152,500 * (1 - 0.41) = $89,975. The new ROE would be $18,250 / $89,975 = 20.28%. The original ROE was $18,250 / ($205,000 * (1 - 0.41)) = 15.09%. The improvement in ROE is 20.28% - 15.09% = 5.19%.

Year Altman Corp