Question

Intro Epson expects the following financial data during the coming year. • Assets: $120,000 • Total debt ratio = Debt/Assets (book values): 30% EBIT: $49,000 • Interest rate: 6% • Tax rate: 34% JB Attempt 1/10 for 10 pts. Part 1 What is the firm's expected ROE? 3+ decimals Submit

Answer 1

1. First we will calculate debt as per below:

Assets (given) = $120000

Total debt ratio = Debt / Assets = 30%

Debt = $120000 * 30% = $36000

Next, we will calculate equity as per below:

Total assets = Debt + Equity

Putting the values in the above equation, we get,

$120000 = $36000 + Equity

Equity = $120000 - $36000 = $84000

Next, we will calculate interest as per below:

Interest = 6% * Debt

Interest = 6% * $36000 = $2160

Next we will calculate Earnings before tax as per below:

Earnings before tax = EBIT - Interest

Earnings before tax = $49000 - $2160 = $46840

Next we will calculate Net income as per below:

Net income = Earnings before tax * (1 - Tax rate)

Net income = $46840 * (1 -34%)

Net income = $46840 * 66%

Net income = $30914.4

Now, we will calculate the expected ROE as per below:

Expected ROE = Net income / Equity * 100

Expected ROE = $30914.4 / $84000 * 100

Expected ROE = 36.803%

2. Net profit margin = Net income / Revenue * 100

Putting the values in the above formula, we get,

Net profit margin = $7772 / $80000 * 100

Net profit margin = 9.715%

Return on assets = Net income / Total assets * 100

Putting the values in the above formula, we get,

Return on assets = $7772 / $167000 * 100

Return on assets = 4.6539%

Return on equity = Net income / Total equity * 100

Putting the values in the above formula, we get,

Return on equity = $7772 / $49000 * 100

Return on equity = 15.861%