Explore BrainMass
Share

Explore BrainMass

    Common equity

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Last year, Urbana Corp. had $197,500 of assets, $307,500 of sales, $19,575 of net income, and a debt-to-total assets ratio of 37.5%. The new CFO believes a new computer software application will enable it to reduce costs and thus raise net income to $33,000. Assets, sales, and the debt ratio would not be affected. By how much would the cost reduction improve the ROE?

    © BrainMass Inc. brainmass.com October 10, 2019, 12:50 am ad1c9bdddf
    https://brainmass.com/economics/income-distribution/309340

    Solution Preview

    Dear Student,

    Thank you for using BM.
    Below are my answers.

    ANSWERS

    Debt-to-total assets = 37.5%
    Assets = $197,500
    Old ROE = $19,575/$123,437.50 = 15.86%

    Equity = (1 - 37.5%)*$197,500 = $123,437.50
    New ROE = $33,000/$123,437.50 = 26.73%

    ROE improved by 68.58%.

    Please double check your formula. Equity multiplier is total assets / total ...

    Solution Summary

    Effects of cost reduction are studied.

    $2.19