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Last year, a company had $480,000 in assets, $38,400 of net income, and a debt-to-total-assets ratio of 40%. Now suppose the newly hired CFO convinces the president to increase the debt ratio to 65%. 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 65%, what will be the new ROE?

Last year, a company had $480,000 in assets, $38,400 of net income, and a debt-to-total-assets ratio of 40%. Now suppose the newly hired CFO convinces the president to increase the debt ratio to 65%. 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 65%, what will be the new ROE?

EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter18: The Management Of Accounts Receivable And Inventories
Section: Chapter Questions
Problem 10P
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Last year, a company had $480,000 in assets, $38,400 of net income, and a debt-to-total-assets ratio of 40%. Now suppose the newly hired CFO convinces the president to increase the debt ratio to 65%. 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 65%, what will be the new ROE?
Transcribed Image Text:Last year, a company had $480,000 in assets, $38,400 of net income, and a debt-to-total-assets ratio of 40%. Now suppose the newly hired CFO convinces the president to increase the debt ratio to 65%. 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 65%, what will be the new ROE?
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