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14 April, 07:21

Last year Oliver Inc had a total assets turnover of 1.60 and an equity multiplier of 1.85. Its sales were $200,000 and its net income was $10,000. The CFO believes that the company could have operated more efficiently, lowered its costs, and increased its net income by $5,000 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

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  1. 14 April, 09:52
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    7.4%

    Explanation:

    As we know that

    ROE = Profit margin * Total asset turnover * Equity multiplier

    where,

    Profit margin = (Net income : Sales) * 100

    = ($10,000 : $200,000) * 100

    = 5%

    So, the ROE would be

    = 5% * 1.60 * 1.85

    = 14.8%

    Now if the net income is increased by $5,000

    So, the updated profit margin would be

    = (Net income : Sales) * 100

    = ($15,000 : $200,000) * 100

    = 7.5%

    And updated ROE would be

    = 7.5% * 1.60 * 1.85

    = 22.2%

    So, the change in ROE would be

    = 22.2% - 14.8%

    = 7.4%
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