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%

Question

Quizplus · Accepted Answer

Explanation:The change in the capital structure would increase the ROE by 4.36%. This is because the increase in debt would increase the financial leverage, which would in turn increase the ROE. The increase in interest expense would be offset by the better cost controls, so the net income would remain unchanged.

Last Year Rosenberg Corp