Last year Kramerica Industries Inc. had $400,000 of assets, an ROA of 10.25%, and a debt...

Last year Kramerica Industries Inc. had $400,000 of assets, an ROA of 10.25%, and a debt ratio of 25%. Now suppose the new CFO convinces the president to increase the debt ratio to 50%. 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.

a. By how much would the change in the capital structure improve the ROE?

b. Is this a good change for Kramerica? Why or why not?

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jeff jeffy answered 8 months ago

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