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jolli1
18 days ago
15

Last year Lowell Inc. had a total assets turnover of 1.40 and an equity multiplier of 1.75. Its sales were $295,000 and its net

income was $10,600. The CFO believes that the company could have operated more efficiently, lowered its costs, and increased its net income to $20,850 without changing its sales, assets, or capital structure. Had it cut costs and increased its net income as expected, how much would the ROE have changed
Business
1 answer:
Scilla [3.8K]18 days ago
7 0

Response:

The return on equity (ROE) would be altered by 8.52%

Clarification:

Initially, we determine the existing ROE utilizing the Dupont Formula, yielding ROE as follows:

ROE = Net Income/Sales * Sales/Total Assets * Total Assets/Equity

or

ROE = Net Profit Margin * Total Assets Turnover * Equity Multiplier

  • Current ROE = 10600/295000 * 1.4 * 1.75 = 0.0880 or 8.8%

The condition states that net income might rise to 20850 while other factors remain unchanged. Therefore, to find the new ROE, we compute the updated Net Profit margin, keeping the total assets turnover and the equity multiplier constant due to the absence of sales, assets, or capital structure changes.

  • New ROE = 20850/295000 * 1.4 * 1.75 = 0.17316 or 17.32%
  • The ROE would have shifted by 17.32 - 8.80 = 8.52%
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