Question

Last year Altman Corp. 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 $152,500. 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?

a) 5.45%.
b) 5.73%.
c) 5.19%.
d) 4.69%.
e) 4.93%.

Answer 1

5.20%

Step-by-step explanation:

The computation of the reduction in assets improve the ROE is shown below:

But before that we need to calculate the following things

Equity ratio = 100 - 41 = 59%

Total equity = $205,000 × 59% = $120,950

ROE = Net income ÷ Total equity

= $18,250 ÷ $120,950

= 15.08%

Again, Total equity = $152,500 × 59% = $89,975

ROE = Net income ÷ Total equity

= $18,250 ÷ $89,975

= 20.28%

Now ROE improved by

= 20.28% - 15.08%

= 5.20%

This is the answer but the same is not provided in the given options