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# Common equity

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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?

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#### Solution Preview

Dear Student,

Thank you for using BM.
Below are my 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

## P5-10, p5-6, p5-4

Nucor Corporation produces steel and steel products at its eight mills and is a major recycler of scrap metal. The following data relate to Nucor for the years indicated.

Nucor Corporation 1999 2000 2001 2002
(\$ in thousands)
Total assets \$3729848 3721788 3759348 4381001
Common stockholders' equity 2262248 2130952 2201460 2322989
sales 4756521 4333707 4801776
Net income 310908 112961 162080
Interest expense 22449 22002 22918
Income tax rate .37 .37 .296

Required:

1. Calculate Nucor's return on assets for 200,2001, and 2002. Decompose ROA into operating profit margin and assets turnover components.
2. Has Nucor's profitability changed over the three years? If so, how?
3. Calculate the rate of return on common stockholders' equity for 2000,2001,and 2002. Decompose ROCE into ROA, common earnings leverage, and financial structure leverage.
4. What seem to be the reasons for the change in ROCE over the three years?
(See attached files for full problem description)

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