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Last year Kramerica Industries Inc. had $400,000 of assets, an ROA of 10.25%, and a debt...

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Finance

Last year Kramerica Industries Inc.had $400,000 of assets, an ROA of 10.25%, and a debt ratio of 25%.Now suppose the new CFO convinces the president to increase thedebt ratio to 50%. Sales and total assets will not be affected, butinterest expenses would increase. However, the CFO believes thatbetter cost controls would be sufficient to offset the higherinterest expense and thus keep net income unchanged.     

     a.   By how much would the change in the capitalstructure improve theROE?                                             

     b.   Is this a good change for Kramerica? Why or whynot?

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Last year Kramerica Industries Inc.had $400,000 of assets, an ROA of 10.25%, and a debt ratio of 25%.Now suppose the new CFO convinces the president to increase thedebt ratio to 50%. Sales and total assets will not be affected, butinterest expenses would increase. However, the CFO believes thatbetter cost controls would be sufficient to offset the higherinterest expense and thus keep net income unchanged.          a.   By how much would the change in the capitalstructure improve theROE?                                                  b.   Is this a good change for Kramerica? Why or whynot?

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