By How Much Must a Firm Reduce Its Assets in Order

question 97

Multiple Choice

By how much must a firm reduce its assets in order to improve ROA from 10 percent to 12 percent if the firm's profit margin is 5 percent on sales of $4 million?

• A)$240,000
• B)$333,333
• C)$400,000
• D)$516,167 current ROA = (sales/assets) x profit margin
• )10 = ($4 million/assets) x .05
• )10 = $200,000/assets
• $2 million = assets
• Proposed ROA = (sales/assets) x profit margin
• )12= ($4 million/assets) x .05
• )12 = $200,000/assets
• $1,666,667 = assets

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Definitions:

Interest Costs

The total cost incurred by borrowing funds, expressed as the interest rate multiplied by the principal over a given period.

Percentage Discount

A percentage discount refers to a reduction in price on goods or services based on a specified percentage of the original price.

Periodic Interest Rate

The interest rate applied to a loan or investment for a specific period, shorter than a year, such as monthly or quarterly.

Annuity

An annuity is a financial offering that ensures a regular payout to an individual, chiefly employed as a means of financial support for retired persons.