Last year Rennie Industries had sales of $280,000,assets of $175,000 (which equals total invested capital),a profit margin of 5.3%,and an equity multiplier of 1.2.The CFO believes that the company could reduce its assets by $51,000 without affecting either sales or costs.The firm finances using only debt and common equity.Had it reduced its assets by this amount,and had the debt/total invested capital ratio,sales,and costs remained constant,how much would the ROE have changed? Do not round your intermediate calculations.

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Quizplus · Accepted Answer

First, calculate the original ROE. Profit = Sales * Profit Margin = $280,000 * 5.3% = $14,840. Original Equity = Assets / Equity Multiplier = $175,000 / 1.2 = $145,833.33. Original ROE = Profit / Equity = $14,840 / $145,833.33 = 10.18%.If assets are reduced by $51,000, new assets = $175,000 - $51,000 = $124,000. New equity = New assets / Equity Multiplier = $124,000 / 1.2 = $103,333.33. New ROE = Profit / New Equity = $14,840 / $103,333.33 = 14.37%.Change in ROE = New ROE - Original ROE = 14.37% - 10.18% = 4.19%.

Last Year Rennie Industries Had Sales of $280,000,assets of $175,000