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%
Hard:

Question

Quizplus · Accepted Answer

The reduction in assets would increase the equity base, thereby improving the Return on Equity (ROE). The initial equity is calculated as $205,000 * (1 - 0.41) = $120,950. The new equity after asset reduction is $152,500 * (1 - 0.41) = $89,975. The initial ROE is $18,250 / $120,950 = 15.09%. The new ROE is $18,250 / $89,975 = 20.28%. The improvement in ROE is 20.28% - 15.09% = 5.19%.

Last Year Altman Corp