Ask Question
12 September, 04:44

Gambona Inc. has sales of $200, net income of $20, total assets of $500, and common equity of $250, all in millions. The new CFO thinks the firm's current asset investment policy is too relaxed, and she proposes to tighten it, reducing inventories and receivables enough to bring total assets down to $300. The total liabilities/assets ratio will be kept at 50%, so common equity will decline from $250 to $150. Assume that this change has no effect on either sales or net income. Using the DuPont equation, by how much would Gambona's ROE increase

+1
Answers (1)
  1. 12 September, 08:05
    0
    ROE increase = 5.33%

    Explanation:

    DuPont Equation (ROE) : (Net Income / Sales) x (Sales / Total Assets) x (Total Assets / Average Shareholders Equity)

    ROE = ($20 / $200) x ($200 / $500) x ($500 / $250) = 8%

    New ROE = ($20 / $200) x ($200 / $300) x ($300 / $150) = 13.33%

    Gambona's ROE would increase by 5.33%
Know the Answer?
Not Sure About the Answer?
Find an answer to your question ✅ “Gambona Inc. has sales of $200, net income of $20, total assets of $500, and common equity of $250, all in millions. The new CFO thinks the ...” in 📘 Business if you're in doubt about the correctness of the answers or there's no answer, then try to use the smart search and find answers to the similar questions.
Search for Other Answers