(a) Last year A Corp and $195,000 of assets, $18,775 of net income and a debt-to-total-assets...

(a) Last year A Corp and $195,000 of assets, $18,775 of net income and a debt-to-total-assets ration of 32%. Now suppose the new CEO convinces the president to increase the debt ratio to $48. Sales and total assets will not be affected but interest expenses would increase. However, the CFO believes tat better cost controls would be sufficient to offset the high interest expense, thus keep net income unchanged. By how much would the change in capital in the capital structure improve the ROE?

(b) Last year A Corp had sales of $315,000 and a net income of $17,832 and its year-end assets were $210,000. The firms total=debt-to-assets ratio was 42.5%. Based on the DuPont equation, what was A Corps ROE?

ROE= (NI/Sales) x (Sales/Total Assets) x (Total Assets/Common Equity)

Expert Solution

jeff jeffy answered 4 weeks ago

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