Last year Mason Inc.had a total assets turnover of 1.33 and an equity multiplier of 1.75.Its sales were $195,000 and its net income was $10,549.The CFO believes that the company could have operated more efficiently,lowered its costs,and increased its net income by $5,250 without changing its sales,assets,or capital structure.Had it cut costs and increased its net income in this amount,by how much would the ROE have changed?
A)5.66%
B)5.95%
C)6.27%
D)6.58%

Question

Quizplus · Accepted Answer

The Return on Equity (ROE) is calculated as Net Income / Equity. The equity multiplier is given as 1.75, which implies that Assets = 1.75 * Equity. Given the total assets turnover is Sales / Assets, we can find Assets = $195,000 / 1.33 = $146,617.29. Therefore, Equity = Assets / Equity Multiplier = $146,617.29 / 1.75 = $83,782.45. The initial ROE is $10,549 / $83,782.45 = 0.1259 or 12.59%. With an additional net income of $5,250, the new net income would be $10,549 + $5,250 = $15,799. The new ROE would be $15,799 / $83,782.45 = 0.1886 or 18.86%. The change in ROE is 18.86% - 12.59% = 6.27%.

Last Year Mason Inc