A company has an expected return on assets of 18%, a debt-to-equity ratio of 50%, an interest rate on debt of 5

Finance Aug 17, 2020

A company has an expected return on assets of 18%, a debt-to-equity ratio of 50%, an interest rate on debt of 5.75%, and a marginal tax rate of 35%. What is its expected ROE?

Expert Solution

Computation of the return on equity (ROE):-

Return on equity = ROA + D/E ratio*(ROA - Interest rate on debt *(1-Tax rate))

= 18% + 50%*(18%-5.75%*(1-35%))

= 18% + (50% * 14.26%)

= 18% + 7.13%

= 25.13%

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