Last year Kruse Corp had $410,000 of assets (which is equal to its total invested capital),$403,000 of sales,$28,250 of net income,and a debt-to-total-capital ratio of 39%.The new CFO believes the firm has excessive fixed assets and inventory that could be sold,enabling it to reduce its total assets and total invested capital to $252,500.The firm finances using only debt and common equity.Sales,costs,and net income would not be affected,and the firm would maintain the same capital structure (but with less total debt).By how much would the reduction in assets improve the ROE? Do not round your intermediate calculations.
A) 7.05%
B) 6.69%
C) 6.41%
D) 7.26%
E) 7.82%

Question

Quizplus · Accepted Answer

The reduction in assets would improve the ROE by increasing the equity multiplier. The original ROE is calculated as Net Income / Equity. With the reduction in assets, the new equity is calculated as $252,500 * (1 - 0.39) = $154,025. The new ROE is $28,250 / $154,025 = 18.35%. The original equity was $410,000 * (1 - 0.39) = $250,100, and the original ROE was $28,250 / $250,100 = 11.30%. The improvement in ROE is 18.35% - 11.30% = 7.05%.

Last Year Kruse Corp Had $410,000 of Assets (Which Is