Last year Rosenberg Corp.had $195,000 of assets, $18,775 of net income, and a debt-to-total-assets ratio of 32%.Now suppose the new CFO convinces the president to increase the debt ratio to 48%.Sales and total assets will not be affected, but interest expenses would increase.However, the CFO believes that better cost controls would be sufficient to offset the higher interest expense and thus keep net income unchanged.By how much would the change in the capital structure improve the ROE?
A) 4.36%
B) 4.57%
C) 4.80%
D) 5.04%
E) 5.30%

Question

Quizplus · Accepted Answer

The increase in the debt ratio will increase the financial leverage and thus the ROE. The ROE will increase from 9.63% to 14.00%, an improvement of 4.36%.

Last Year Rosenberg Corp