Question

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?

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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