Last year Central Chemicals had sales of $205,000,assets of $127,500,a profit margin of 5.3%,and an equity multiplier of 1.2.The CFO believes that the company could reduce its assets by $21,000 without affecting either sales or costs.Had it reduced its assets in this amount,and had the debt ratio,sales,and costs remained constant,by how much would the ROE have changed?
A)1.81%
B)2.02%
C)2.22%
D)2.44%

Question

Quizplus · Accepted Answer

The reduction in assets would increase the asset turnover ratio, which in turn would increase the ROE. The new assets would be $106,500, and the equity would be $106,250. The new ROE would be 10.62%, an increase of 2.02% from the original ROE of 8.6%.

Last Year Central Chemicals Had Sales of $205,000,assets of $127,500,a