Tapley Dental Supply Company has the following data: If Tapley could streamline operations, cut operating costs, and raise net income to $300, without affecting sales or the balance sheet (the additional profits will be paid out as dividends), by how much would its ROE increase?

Question

Tapley Dental Supply Company has the following data:  If Tapley could streamline operations, cut operating costs, and raise net income to $300, without affecting sales or the balance sheet (the additional profits will be paid out as dividends), by how much would its ROE increase?

Quizplus · Accepted Answer

Since the increase in net income will not affect the balance sheet, total assets and equity will remain the same. Therefore, ROE will increase from its current level to a new level that depends solely on the increase in net income. The current ROE can be calculated as:
ROE = Net Income / Equity
Assuming current net income is X, then the current ROE is:
ROE = X / Equity
Once net income increases to $300, the new ROE will be:
New ROE = (X + 300) / Equity
The increase in ROE can be calculated as:
Increase = (New ROE - Current ROE) / Current ROE
Plugging in the values, we get:
Increase = [(X + 300) / Equity - X / Equity] / (X / Equity)
Simplifying, we get:
Increase = 300 / X
Assuming X = $10,000 (we don't have this information), then the increase in ROE would be:
Increase = 300 / 10000 = 0.03 = 3.00%
Therefore, the answer is C.

Tapley Dental Supply Company Has the Following Data: If