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Confu Inc

Accounting

Confu Inc. expects to have the following data during the coming year. What is the firm's expected ROE? 
Assets $165,000 Interest rate Debt/Assets, book value 65% Tax rate EBIT $25,000 
a. 14.50% b. 14.33% c. 19.28% 
8% 
40% 
 

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Answer

d .

Explanation

Computation of Firm's Expected ROE:

Return on Equity (ROE) = Net Income/Shareholders' Equity

Here,

Debt/Assets = 65%

65% = Total Debt/$165,000

Total Debt = $165,000*65% = $107,250

Total Assets = Total Debt + Total Shareholder's Equity

$165,000 = $107,250 +  Total Shareholder's Equity

 Total Shareholder's Equity = $165,000 - $107,250 = $57,750

Interest = $107,250*8% = $8,580

Income before Tax = EBIT - Interest = $25,000-$8,580 = $16,420

Net Income = $16,420*(1-40%) = $9,852

Return on Equity (ROE) = $9,852/$57,750 = 17.06%