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6 November, 11:04

By how much must a firm reduce its assets in order to improve ROA from 10% to 12% if the firm's operating profit margin is 5% on sales of $4 million? Assume that the reduction in assets has no effect on sales or profit margin

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  1. 6 November, 11:14
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    ROA = 10% TA = 2.000.000

    ROA=12% TA = 1.666.667

    Reducction in assets 333.333

    Explanation:

    ROA=Net income/Average Total Assets

    ROA = (net income / sales) x (sales / Total Assets)

    ROA = Margin x Average total assets

    10%=5%X (4000000/TA) 2,0 = 4000000/TA

    12%=5%X (4000000/TA) 2,4 = 4000000/TA

    ROA = 10% TA = 2.000.000

    ROA=12% TA = 1.666.667
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