Question

Purple Panda Products Inc. is considering a project that will require $650,000 in assets. The project will be financed with 100% equity. The company faces a tax rate of 30%. Assuming that the project generates an expected EBIT (earnings before interest and taxes) of $170,000, then Purple Panda’s anticipated ROE (return on equity) for the project will be:
a. 14.65%
b. 18.31%
c. 11.90%
d. 10.99%

Answer 1

Answer:

18.31%

Explanation:

Purple panda products incorporation has a shareholder's equity of $650,000

The tax rate is 30%

=30/100

= 0.3

The EBIT is $170,000

The first step is to calculate the net income

Net income= EBIT - tax

= $170,000-(0.3×170,000)

= $170,000-51,000

= 119,000

Therefore, the ROE can be calculated as follows

ROE= Net income/shareholder's equity

= 119,000/650,000

= 0.1831×100

= 18.31%

Hence the ROE is 18.31%