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?

Question

Business

Hailie Massey

13 June, 06:37

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?

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Answers (1)

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Mirabel · Answer 1

The impact in the ROE by reducing the Total Assets is 5,19%

Explanation:

The ROE it's measure by dividing the Net Income by Equity, when the Total Assets change there is an impact on the Equity.

The improvements in this ratio are through the Net Income or changes in Total Assets.

Assets - Debt - Debt/Assets - Income - ROE

205.000 - 84.050 - 41% - 18.250 - 8,9%

Assets - Debt - Debt/Assets Income ROE - Var

130.975 - 62.525 - 41% - 18.250 - 13,9% - 5%