Last year Mason Inc. had a total assets turnover of 1.33 and an equity multiplie

Question

Last year Mason Inc. had a total assets turnover of 1.33 and an equity multiplier of 1.75. Its sales were $330,000 and its net income was $10,549. The CFO believes that the company could have operated more efficiently, lowered its costs, and increased its net income by $5,250 without changing its sales, assets, or capital structure. Had it cut costs and increased its net income in this amount, by how much would the ROE have changed? Select the correct answer. ? a. 4.26% O b. 4.82% ? ?. 2.58% O d. 3.14% O e. 3.7096

Explanation / Answer

Before change in costs:

Total Assets Turnover = 1.33
Equity Multiplier = 1.75
Sales = $330,000
Net Income = $10,549

Total Assets Turnover = Sales / Total Assets
1.33 = $330,000 / Total Assets
Total Assets = $248,120.30

Equity Multiplier = Total Assets / Equity
1.75 = $248,120.30 / Equity
Equity = $141,783.03

After change in costs:

Net Income = $5,250
Equity = $141,783.03

ROE = Net Income / Equity
ROE = $5,250 / $141,783.03
ROE = 3.70%

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