Answer:
ROE = 16.98%
Explanation:
The question is to determine Amer Company's Return on Equity
The following steps are taken:
1) The Total Debt ÷ Total Assets = 35%
It means Total Debt ÷ 1000= 0.35
Meaning 0.35 x $1,000 = $350 and this is the total debt
2) Calculate Interest on debt
Interest on debt = Interest rate on total debt x total debt
= 4.57% x $350 = $16
3) Now calculate the Net Income from Earnings before Interest and Tax
Earnings before Interest and tax = $200
less interest $16
Earnings Before Tax $184
Subtract tax (40% of EBT) $73.6
Net income $110.4
4) Calculate the Return on Equity
= Net income/ Shareholders' Equity
= $110.4/ ($1,000-$300)
= 16.98%
