Last year, a company had $355,000 in assets, $26,275 of net income, and a debt-to-total-assets ratio of 44%. Now suppose the newly hired CFO convinces the president to increase the debt ratio to 58%. 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 therefore keep net income unchanged. Assuming the president of the firm allows the CFO to increase the debt ratio to 58%, what will be the new ROE'?

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter18: The Management Of Accounts Receivable And Inventories
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Last year, a company had $355,000 in assets,
$26,275 of net income, and a debt-to-total-assets
ratio of 44%. Now suppose the newly hired CFO
convinces the president to increase the debt ratio
to 58%. 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
therefore keep net income unchanged.
Assuming the president of the firm allows the CFO
to increase the debt ratio to 58%, what will be the
new ROE'?
Transcribed Image Text:Last year, a company had $355,000 in assets, $26,275 of net income, and a debt-to-total-assets ratio of 44%. Now suppose the newly hired CFO convinces the president to increase the debt ratio to 58%. 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 therefore keep net income unchanged. Assuming the president of the firm allows the CFO to increase the debt ratio to 58%, what will be the new ROE'?
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