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Last year Viera Corp had $155,000 of assets, $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. Assets, total invested capital, sales, and the debt to capital ratio would not be effected. By how much would the cost reduction improve the ROE?

Respuesta :

abiolataiwo2015

Answer:

13.41%

Explanation:

Calculation for By how much would the cost reduction improve the ROE

First step

Debt value = $155,000 × 37.5%

Debt value = $58,125

Second step

Equity value = $155,000 - $58,125

Equity value $96,875

Third step

= (Net income ÷ Total equity) × 100

Ratio = ($20,000 ÷ $96,875) × 100 = 20.65%

New ROE would be = ($33,000 ÷ $96,875) × 100 = 34.06%

Fourth step

Change in ROE= New ROE - Old ROE

ROE= 34.06% - 20.65%

ROE= 13.41%

Therefore By how much would the cost reduction improve the ROE is 13.41%

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