Last Year Swensen Corp

question 88

Multiple Choice

Last year Swensen Corp.had sales of $303,225, operating costs of $267,500, and year-end assets of $195,000.The debt-to-total-assets ratio was 27%, the interest rate on the debt was 8.2%, and the firm's tax rate was 25%.The new CFO wants to see how the ROE would have been affected if the firm had used a 45% debt ratio.Assume that sales and total assets would not be affected, and that the interest rate and tax rate would both remain constant.By how much would the ROE change in response to the change in the capital structure?

• A) 2.48%
• B) 2.76%
• C) 3.06%
• D) 3.40%
• E) 3.74%

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Definitions:

Income Statement

A financial statement that shows a company's revenues and expenses over a specific period, illustrating how the revenues are transformed into net income or loss.

Net Income

The total earnings of a company after all expenses and taxes have been subtracted from total revenue.

Bank Reconciliation

The process of matching the balances in an entity’s accounting records for a cash account to the corresponding information on a bank statement.

Corrected Cash Balance

An adjustment made to a company's book balance of cash to reflect accurate amounts after reconciliation.