Last year Ann Arbor Corp had $180,000 of assets (which equals total invested capital), $305,000 of sales, $19,000 of net income, and a debt-to-total-capital ratio of 37.5%.The new CFO believes that a new computer program will enable the company to reduce costs and thus raise net income to $31,000. The firm finances using only debt andcommon equity. Assets, total invested capital, sales, and the debt-to-capital ratio would not be affected. By how much would the cost reduction improve the ROE? Do notround your intermediate calculations.

The objective of the question is to calculate the improvement in the Return on Equity (ROE) due to…

Answered: Last year Ann Arbor Corp had $180,000…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Last year Ann Arbor Corp had $155,000 of assets (which equals total invested capital), $305,000 of sales, $20,000 of net income, and a debt-to-total-capital ratio of 37.5%. The new CFO believes that a new computer program will enable the company to reduce costs and thus raise net income to $31,000. The firm finances using only debt and common equity. Assets, total invested capital, sales, and the debt-to-capital ratio would not be affected. By how much would the cost reduction improve the ROE? Do not round your intermediate calculations. a. 11.35 p.p. b. 15.14 p.p. c. 18.92 p.p. d. 20.65 p.p. e. 7.10 p.p.

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