Last year Kruse Corp had $355,000 of assets, $403,000 of sales, $28,250 of net income, and a debt-to-total-assets ratio of 39%. The new CFO believes the firm has excessive fixed assets and inventory that could be sold, enabling it to reduce its total assets to $252,500. Sales, costs, and net income would not be affected, and the firm would maintain the same debt ratio (but with less total debt). By how much would the reduction in assets improve the ROE?© BrainMass Inc. brainmass.com October 17, 2018, 12:39 am ad1c9bdddf
The present amount of assets = 355,000.
Debt to assets = 39%
Total amount of debt = 355,000 X 39% = 138,450
Amount of ...
The solution explains how to determine the improvement in ROE due to reduction in assets
Calculation of ROE: Technology Inc. Exercise.
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.View Full Posting Details