Last year Central Chemicals had sales of $205,000, assets of $127,500, a profit margin of 5.3%, and an equity multiplier of 1.2. The CFO believes that the company could reduce its assets by $21,000 without affecting either sales or costs. Had it reduced its assets in this amount, and had the debt-to-assets ratio, sales, and costs remain constant, by how much would the ROE have changed

Question

Axel Sims

Business

2 July, 04:01

Last year Central Chemicals had sales of $205,000, assets of $127,500, a profit margin of 5.3%, and an equity multiplier of 1.2. The CFO believes that the company could reduce its assets by $21,000 without affecting either sales or costs. Had it reduced its assets in this amount, and had the debt-to-assets ratio, sales, and costs remain constant, by how much would the ROE have changed

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Nico Ochoa · Answer 1

ROE = Profit margin*Asset turnover*Equity multiplier

Asset turnover = Sales/Total Sales = 205,000/127,500 = 1.6078

Current ROE = 0.053*1.6078*1.2 = 0.1023

New ROE = 0.053*205,000/106,500*1.2 = 0.1224

Change in ROE = New - Current = 0.1224-0.1023 = 0.0201 = 2.01%