Last Year Jandik Corp

question 10

Multiple Choice

Last year Jandik Corp.had $295,000 of assets (which is equal to its total invested capital) ,$18,750 of net income,and a debt-to-total-capital ratio of 37%.Now suppose the new CFO convinces the president to increase the debt-to-total-capital ratio to 48%.Sales,total assets and total invested capital will not be affected,but interest expenses would increase.However,the CFO believes that better cost controls would be sufficient to offset the higher interest expense and thus keep net income unchanged.By how much would the change in the capital structure improve the ROE? Do not round your intermediate calculations.

• A) 2.60%
• B) 2.37%
• C) 2.50%
• D) 2.13%
• E) 1.64%

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Definitions:

Double Coincidence

A situation in a barter system where two parties each hold an item the other wants, facilitating an exchange without the need for money.

Barter

The exchange of one good or service for another good or service; a trade.

M2

A measure of the money supply that includes all elements of M1 (cash and checking deposits) plus savings deposits, money market mutual funds, and other time deposits.

M1

A segment of the money supply encompassing all tangible currency, such as bills and coins, in addition to demand deposits, checking accounts, and negotiable order of withdrawal (NOW) accounts.