A small company has the following data:   Net income:   $240     Sales:      $10,000       Total assets:   $6,000 Debt ratio:      75%     TIE ratio:  2.0         Current ratio:  1.2 BEP ratio:     13.33%  If the firm 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?

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Asked Aug 24, 2019
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A small company has the following data: 
 
Net income:   $240     Sales:      $10,000       Total assets:   $6,000 Debt ratio:      75%     TIE ratio:  2.0         Current ratio:  1.2 BEP ratio:     13.33%
 
If the firm 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?

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Expert Answer

Step 1

Equity, E = Total assets x (1 - Debt ratio) = $6,000 x (1 - 75%) = $ 1,500

ROE currently = Net income / E = 240 / 1,500 = 16%

Step 2

New net income = $ 300

Hence, new ROE = New net income / E = 300 / 1...

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