Question

ABC Inc. expects to have the following data during the coming year. What is the firm's expected ROE?

Assets $160,000

Interest rate 5%

Debt/Asset ratio 70%

Tax rate 40%

EBIT $25,000

Answer 1

Answer:

Debt/ Asset ratio = Debt / Asset
0.70 = Debt / $160,000
Debt = 0.70 * $160,000
Debt = $112,000

Stockholders Equity = Assets – Debt
Stockholders Equity = $160,000 - $112,000
Stockholders Equity = $48,000

Interest = Debt *5%
Interest = $112,000 * 5%
Interest = $5,600

EBT = EBIT – Interest
EBT = $25,000 - $5,600
EBT = $19,400

Net Income = EBT – Tax
Net Income = $19,400 – ($19,400 * 40%)
Net Income = $19,400 - $7,760
Net Income = $11,640

ROE = Net Income / Stockholders Equity *100
ROE = $11,640 / $48,000 *100
ROE = 24.25%