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 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

First, let's calculate the current ROE:

ROE = Net Income / Shareholder's Equity

We need to find the Shareholder's Equity, which can be calculated using the equity multiplier:

Equity Multiplier = Total Assets / Shareholder's Equity

1.75 = Total Assets / Shareholder's Equity

Shareholder's Equity = Total Assets / 1.75

Shareholder's Equity = $295,000 / 1.75

Shareholder's Equity = $168,571.43

Now we can calculate the current ROE:

ROE = $10,600 / $168,571.43

ROE = 0.063

ROE = 6.3%

If the company had cut costs and increased its net income by $10,250, the new net income would be:

New Net Income = $10,600 + $10,250

New Net Income = $20,850

The new ROE can be calculated as:

New ROE = New Net Income / Shareholder's Equity

New ROE = $20,850 / $168,571.43

New ROE = 0.1236

New ROE = 12.36%

The change in ROE can be calculated as:

Change in ROE = New ROE - Current ROE

Change in ROE = 12.36% - 6.3%

Change in ROE = 6.06%

Therefore, the answer is C) 8.09%, because the new ROE is 12.36% and the current ROE is 6.3%, a difference of 6.06%.

Last Year Blease Inc Had a Total Assets Turnover of 1.33