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Confu Inc
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%
Expert Solution
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%
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