Last year ABC Company had $200,000 of total assets, $25,746 of net income, and a debt-to-total-assets ratio of 32%. Now suppose the new CFO convinces the president to increase the debt-to-total assets ratio to 45%. 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 (that is, new ROE - old ROE)? Round your answer to two decimal places of percentage. (Hint: ROE = net income/common equity) Group of answer choices 4.39% 4.47% 4.42% 4.53% 4.50%
Last year ABC Company had $200,000 of total assets, $25,746 of net income, and a debt-to-total-assets ratio of 32%. Now suppose the new CFO convinces the president to increase the debt-to-total assets ratio to 45%. 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 (that is, new ROE - old ROE)? Round your answer to two decimal places of percentage. (Hint: ROE = net income/common equity) Group of answer choices 4.39% 4.47% 4.42% 4.53% 4.50%
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Last year ABC Company had $200,000 of total assets, $25,746 of net income, and a debt-to-total-assets ratio of 32%. Now suppose the new CFO convinces the president to increase the debt-to-total assets ratio to 45%. 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 (that is, new ROE - old ROE)? Round your answer to two decimal places of percentage. (Hint: ROE = net income/common equity)
Group of answer choices
4.39%
4.47%
4.42%
4.53%
4.50%
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