The question is:
Last year a company had $200,000 of assets, $300,000 of sales, $20,000 of net income, and a debt to total assets ratio of 40%. The new CRO believes a new computer program will enable it to reduce costs and thus raise net income to $30,000. Assets, sales, and debt ratio would not be affected. By how much would the cost reduction improve the ROE?
I know that the ROE=net income/sales * sales/total assets* 1+debt to total assets. I worked this out once for the old ROE and once for the new ROE and subtracted the two. I got 14 for the old and 21 so 7 would be the cost reduction. However, the answer is supposed to be 8.33%. I don't really understand how to arrive at this answer.
Last year a company had $200,000 of assets, $300,000 of sales, $20,000 of net income, and a debt to total assets ratio of 40%. The new CRO believes a new computer program will enable it to reduce costs and thus raise net income to $30,000. Assets, sales, and debt ratio would not be affected. By how much would the cost reduction improve the ROE?
I know that the ROE=net income/sales * sales/total assets* 1+debt to total assets. I worked this out once for the old ROE and once for the new ROE and subtracted the two. I got 14 for the old and 21 so 7 would be the cost reduction. However, the answer is supposed to be 8.33%. I don't really understand how to arrive at this answer.