Last 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

ROE (Return on Equity) = Net Income/Total Equity

Initially, Total Equity = Assets - Debt = $205,000*(1-41%) = $120,950
So, ROE = $18,250/$120,950 = 15.07%

After the reduction in assets, new Total Equity = $152,500*(1-41%) = $90,025
So, ROE = $18,250/$90,025 = 20.27%

The percentage increase in ROE = [(20.27%-15.07%)/15.07%] * 100% = 34.49%
Therefore, the reduction in assets will improve the ROE by 5.19%. The best choice is (C).

Last Year Altman Corp