Company had P15M in sales, while total fixed costs were held to P6M. The firm’s total...
Company had P15M in sales, while total fixed costs were held to P6M. The firm’s total assets averaged P20M and the debt to equity ratio was calculated at 0.60. If the firm’s EBIT is P3M, the interest on all debt is 9%, and the tax rate is 40%, what is the return on equity?
Homework Answers
| Debt to equity = debt / equity | ||||
| 0.60 = Debt / equity | ||||
| 1 debt = 0.60 equity | ||||
| therefore weight of equity = 1/1.60 | ||||
| =62.5% | ||||
| Weight of debt = 37.5% | ||||
| Total debt = P 20M *37.5% | ||||
| =P7 .5 M | ||||
| Interest on debt = P 7.5 *9% | ||||
| =P0.675 M | ||||
| Net Income = (EBIT - Interest)*(1- Tax rate) | ||||
| =(P3M-0.675 M) *(1-0.40) | ||||
| =P 1.395 M | ||||
| Equity =P 20M *62.5% | ||||
| =P 12.5 M | ||||
| Return on equity = net income / equity | ||||
| =P1.395/12.5 | ||||
| =11.16% | ||||
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