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20 March, 23:58

Last year Rosenberg Corp. had $195,000 of assets, $18,775 of net income, and a debt-to-total-assets ratio of 32%. Now suppose the new CFO convinces the president to increase the debt ratio to 48%. Sales and total assets will not be affected, but interest expenses would increase. However, the CFO believes that better cost controls would be sufficient to offset the higher interest expense and thus keep net income unchanged. By how much would the change in the capital structure improve the ROE

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  1. 21 March, 01:00
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    Increase in ROE 4.36%

    Explanation:

    Assets $195,000

    Old debt ratio 32%

    Old debt (32%*$195,000) $62,400

    Old equity ($195,000-$62,400) $132,600

    New debt ratio 48%

    New debt (48% * $195,000) $93,600

    New Equity ($195,000-$93,600) $101,400

    Net income $18,775

    New ROE 18.52%

    Old ROE 14.16%

    Increase in ROE 4.36%
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