Change in Capital Structure Improving the Return on Equity
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Last year Technology Inc which was brought by My Space, had $256,392 of assets, $18,775 of net income and a debt ratio of 35%. Suppose the CFO increase the debt ratio to 45%. Sales and total assets will not be affected, but interest expenses would increase. 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 the change in the capital structure improve the ROE.
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Solution Summary
For your review, I have attached a formatted MS excel spreadsheet which contains detailed instructions on the calculation of Return on Equity (ROE), using the Technology Inc. Exercise as a specific example.
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