Tapley Dental Supply Company has the following data: Net income: $240 Sales: $10,000 Total assets: $6,000
Debt ratio: 75% TIE ratio: 2.0 Current ratio: 1.2
BEP ratio: 13.33%
If Tapley could streamline operations, cut operating costs, and raise net income to $300, without affecting sales or the balance sheet (the additional profits will be paid out as dividends), by how much would its ROE increase?
A) 3.00%
B) 3.50%
C) 4.00%
D) 4.25%
E) 5.50%

Question

Quizplus · Accepted Answer

First, we need to calculate the current ROE using the given data:
ROE = Net Income / Total Equity
Total Equity = Total Assets - Total Liabilities
Total Liabilities = Total Assets x Debt Ratio = $6,000 x 0.75 = $4,500
Total Equity = $6,000 - $4,500 = $1,500
ROE = $240 / $1,500 = 0.16 or 16%

Next, we need to calculate the new ROE assuming net income increases to $300:
Net Income = $300
Total Equity remains the same at $1,500
ROE = $300 / $1,500 = 0.20 or 20%

Finally, we calculate the increase in ROE:
Increase in ROE = New ROE - Current ROE
Increase in ROE = 20% - 16% = 4%

Therefore, the answer is (C) 4.00%.

Tapley Dental Supply Company Has the Following Data: Net Income