Last year Urbana Corp.had $197,500 of assets,$307,500 of sales,$19,575 of net income,and a debt-to-total-assets ratio of 37.5%.The new CFO believes a new computer program will enable it to reduce costs and thus raise net income to $33,000.Assets,sales,and the debt ratio would not be affected.By how much would the cost reduction improve the ROE?
A)9.32%
B)9.82%
C)10.33%
D)10.88%

Question

Quizplus · Accepted Answer

ROE = net income / total equity
Total equity = total assets - total debt
Before cost reduction:
ROE = 19,575 / (197,500 - 0.375 * 197,500) = 14.62%
After cost reduction:
ROE = 33,000 / (197,500 - 0.375 * 197,500) = 16.20%
Improvement in ROE = (16.20% - 14.62%) / 14.62% = 10.88% (rounded to two decimal places)

Last Year Urbana Corp