Question

The Marfa Mining Company has the following capital structure:

Bonds (8.5%) $90 mil

Common Stock (2.50 par) $80 mil

Retained Earnings $45 mil

The firm has EBIT of $120 million and a tax rate of 30 percent. What is the ROE and EPS?

Answer 1

ROE is computed as shown below:

= [ (EBIT - Amount of bonds x interest rate) x (1 - tax rate) ] / (Common stock + Retained Earnings)

= [ ($ 120 million - $ 90 million x 8.5%) x (1 - 0.30) ] / ($ 80 million + $ 45 million)

= $ 78.645 million / $ 125 million

= 62.916%

EPS is computed as follows:

= $ 78.645 million / Number of shares

= [ $ 78.645 million / ($ 80 million / 2.50) ]

= $ 78.645 million / 32 million

= $ 2.46 Approximately

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