Question

Last year Mason Inc. had a total assets turnover of 1.33 and an equity multiplier of...

Last year Mason Inc. had a total assets turnover of 1.33 and an equity multiplier of 1.75. Its sales were $145,000 and its net income was $10,549. The CFO believes that the company could have operated more efficiently, lowered its costs, and increased its net income by $5,250 without changing its sales, assets, or capital structure. Had it cut costs and increased its net income in this amount, by how much would the ROE have changed?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

We need to use the Dupont formula to calculate return on equity (ROE).
ROE=Net income/ Shareholders Equity
=(Net income/Sales)*(Sales/Total Assets)*(Total Assets/Shareholders Equity)

Net income/Sales is called as profit margin
Sales/Total Assets is called as asset turnover
Total Assets/Shareholders equity is called as financial leverage or equity multiplier.

Case 1:
ROE=(Net income/Sales)*(asset turnover)*(equity multiplier)
=(10549/145000)*1.33*1.75=0.169329638

Case 2:
When the net income goes up by $5,250, new net income is 10549+5250=15799, new ROE will be:
=(15799/145000)*1.33*1.75=0.25360119

Change in ROE=0.25360119-0.169329638=0.084271552 or 8.43% (Rounded to two decimal places)
So, the ROE would increase by 8.43%

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Last year Mason Inc. had a total assets turnover of 1.33 and an equity multiplier of...
Last year Mason Inc. had a total assets turnover of 1.33 and an equity multiplier of 1.75. Its sales were $145,000 and its net income was $10,549. The CFO believes that the company could have operated more efficiently, lowered its costs, and increased its net income by $5,250 without changing its sales, assets, or capital structure. Had it cut costs and increased its net income in this amount, by how much would the ROE have changed?
Last year Mason Inc. had a total assets turnover of 1.33 and an equity multiplier of...
Last year Mason Inc. had a total assets turnover of 1.33 and an equity multiplier of 1.75. Its sales were $245,000 and its net income was $10,549. The CFO believes that the company could have operated more efficiently, lowered its costs, and increased its net income by $5,250 without changing its sales, assets, or capital structure. Had it cut costs and increased its net income in this amount, by how much would the ROE have changed? Select the correct answer....
Last year Blease Inc had a total assets turnover of 1.33 and an equity multiplier of...
Last year Blease Inc had a total assets turnover of 1.33 and an equity multiplier of 1.75. Its sales were $270,000 and its net income was $10,600. The firm finances using only debt and common equity, and its total assets equal total invested capital. The CFO believes that the company could have operated more efficiently, lowered its costs, and increased its net income by $10,250 without changing its sales, assets, or capital structure. Had it cut costs and increased its...
Last year XYZ (Pty) Ltd had sales of R202 601, assets of R126 178, a profit...
Last year XYZ (Pty) Ltd had sales of R202 601, assets of R126 178, a profit margin of 5.3%, and an equity multiplier of 1.3. The CFO believes that the company could reduce its assets by R20154 without affecting either sales or costs. Had it reduced its assets in this amount, and had the debt-to-asset ratio, sales and costs remained constant, by how much would the ROE have changed?
Last year Elite Tech had $205,000 of assets, $303,500 of sales, $18,250 of net income, and...
Last year Elite Tech had $205,000 of assets, $303,500 of sales, $18,250 of net income, and a debt-to-total-assets ratio of 41%. The new CFO believes the firm has excessive fixed assets and inventory that could be sold, enabling it to reduce its total assets to $155,500. Sales, costs, and net income would not be affected, and the firm would maintain the 41% debt ratio. By how much would the reduction in assets improve the ROE?
Last year Urbana Corp. had $160,000 of assets, $307,500 of sales, $19,575 of net income, and...
Last year Urbana Corp. had $160,000 of assets, $307,500 of sales, $19,575 of net income, and a debt-to-total-assets ratio of 37.5%. The new CFO believes a new computer program will enable it to reduce costs and thus raise net income to $33,000. Assets, sales, and the debt ratio would not be affected. By how much would the cost reduction improve the ROE?
Last year Ann Arbor Corp had $240,000 of assets (which equals total invested capital), $305,000 of...
Last year Ann Arbor Corp had $240,000 of assets (which equals total invested capital), $305,000 of sales, $20,000 of net income, and a debt-to-total-capital ratio of 37.5%. The new CFO believes that a new computer program will enable the company to reduce costs and thus raise net income to $33,000. The firm finances using only debt and common equity. Assets, total invested capital, sales, and the debt to capital ratio would not be affected. By how much would the cost...
Last year Ann Arbor Corp had $155,000 of assets (which equals total invested capital), $305,000 of...
Last year Ann Arbor Corp had $155,000 of assets (which equals total invested capital), $305,000 of sales, $20,000 of net income, and a debt-to-total-capital ratio of 37.5%. The new CFO believes a new computer program will enable it to reduce costs and thus raise net income to $33,000. The firm finances using only debt and common equity. Assets, total invested capital, sales, and the debt to capital ratio would not be affected. By how much would the cost reduction improve...
Last year Jandik Corp. had $250,000 of assets (which is equal to its total invested capital),...
Last year Jandik Corp. had $250,000 of assets (which is equal to its total invested capital), $18,750 of net income, and a debt-to-total-capital ratio of 37%. Now suppose the new CFO convinces the president to increase the debt-to-total-capital ratio to 48%. Sales, total assets and total invested capital will not be affected, but interest expenses would increase. However, the CFO believes that better cost controls would be sufficient to offset the higher interest expense and thus keep net income unchanged....
Last year Rosenberg Inc. had $225,000 of assets, $48,775 of EBIT, and a debt-to-total-assets ratio of...
Last year Rosenberg Inc. had $225,000 of assets, $48,775 of EBIT, and a debt-to-total-assets ratio of 32%. Now suppose the new CFO convinces the president to increase the debt ratio to 48%. Sales and total assets will not be affected, but interest expenses would increase. The interest rate on the firm’s debt was 7.5%, and the tax rate was 35%. Assume that the interest rate and tax rate would both remain constant. By how much would the change in the...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT