exotica limited has $ 5 lacs in assets that are financed with 100% equity.
The fixed cost = $ 1.2 lacs.
The EBIT of the company for the year i = $ 80000.
tax rate is = 40%.
In case its EBIT increases by 10%and reduces by 10% Define,
calculate & interpret the
a. Net income
b. Return on equity
a. Net income : Net income is net earnings after deducting all expenses, depreciation, tax and interest from income.
b. Return on equity: Return on Equity is an important indicator to shareholders of the firm. It measure the profitability of equity fund invested in the firm.
ROE = Net income /Average equity
|Current||10% increase||10% decrease|
|Tax rate 40%||32000||35200||28800|
|Return on equity||48,000/500,000=9.6%||52800/500,000=10.56%||43200/500000=8.64%|
1. When EBIT incease and tax rate remain same Net income increase or decrease in proportion of EBIT.
2. IF Company is 100% finance by equity. Then ROE increase or decrease in proportion to Net income.
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