Answer:
4.04%
Explanation:
Step 1: Calculation of last year return on equity (ROE)
Last year profit = $270,000 × 5.3% = $14,310.00
Asset/Equity = Equity multiplier
Therefore, we have:
$175,000/Last year equity = 1.2
Last year equity = $175,000/1.2 = $145,833.33
Last year ROE = last year profit/Last year equity = $14,310.00/$145,833.33 = 0.0981 or 9.81%
Step 2: Calculation of ROE when asset is reduced by $51,000
Since profit will not change,
Profit after asset reduction = Last year profit = $14,310.00
New asset value = $175,000 - $51,000 = $124,000
Therefore, we have:
Equity after asset reduction = $124,000/1.2 = $103,333.33
ROE after asset reduction = $14,310.00/$103,333.33 = 0.1385 or 13.85%
Step 3: Calculation of amount of change in ROE
Change in ROE = ROE after asset reduction - Last year ROE = 13.85% - 9.81% = 4.04%
Conclusion
From the calculations above, ROE would change by 4.04% is the reduced by $51,000 based on the other conditions stated.
