# 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?

Question
1 views

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?

check_circle

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...

### Want to see the full answer?

See Solution

#### Want to see this answer and more?

Solutions are written by subject experts who are available 24/7. Questions are typically answered within 1 hour.*

See Solution
*Response times may vary by subject and question.
Tagged in 