Question

Hernandez Corporation expects to have the following data during the coming year. What is Hernandez's expected ROE? Assets $200,000 Interest rate 8% D/A 65% Tax rate 40% EBIT $25,000

Answer 1

Answer:

12.51%

Explanation:

return on equity (ROE) = net income / shareholders' equity

since assets = $200,000

liabilities + equity = $200,000

liabilities = $200,000 x 65% = $130,000

equity = $200,000 - $130,000 = $70,000

net income = (EBIT - interests) x (1 - taxes)

• EBIT = $25,000
• interests = $130,000 x 8% = $10,400
• 1 - taxes = 1 - 40% = 0.6

net income = ($25,000 - $10,400) x 0.6 = $8,760

ROE = $8,760 / $70,000 = 12.51%