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Macleay Farms is considering a project that will require $400,000 in assets. The project’s EBIT is...

Macleay Farms is considering a project that will require $400,000 in assets. The project’s EBIT is expected to be $70,000 and it will be financed with 40% Debt and 60% Equity. The tax rate is 40% and MacLeay can borrow at 10%. Find the company’s return on equity (ROE) for this project.
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Answer #1

Value of Assets = $400,000

Value of Debt = 40% * Value of Assets
Value of Debt = 40% * $400,000
Value of Debt = $160,000

Interest Expense = 10% * Value of Debt
Interest Expense = 10% * $160,000
Interest Expense = $16,000

Value of Equity = 60% * Value of Assets
Value of Equity = 60% * $400,000
Value of Equity = $240,000


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