The Amer Company has the following characteristics: What is Amer’s ROE? Sales: $1,000 Total assets: $1,000...
The Amer Company has the following characteristics: What is Amer’s ROE?
Sales: $1,000 Total assets: $1,000
Total debt ratio: 35% Interest rate on total debt: 4.57%
Tax rate: 40% Basic Earning Power (BEP) ratio: 20%
Homework Answers
| ROE | = | Net Income available to equityholders | / | Equity | |||
| = | $ 110.41 | / | $ 650 | ||||
| = | 16.99% | ||||||
| Working: | |||||||
| # 1 | Earning Before Interest and Taxes (EBIT) | = | Total Assets | * | BEP ratio | ||
| = | $ 1,000 | * | 20% | ||||
| = | $ 200 | ||||||
| # 2 | Total Debt | = | Total assets | * | Total debt ratio | ||
| = | $ 1,000 | * | 35% | ||||
| = | $ 350 | ||||||
| # 3 | Interest expense | = | Total debt | * | Interest rate on total debt | ||
| = | $ 350 | * | 4.57% | ||||
| = | $ 16.00 | ||||||
| # 4 | Tax Expense | = | (EBIT-Interest Expense)*Tax Rate | ||||
| = | (200-16)*40% | ||||||
| = | $ 73.60 | ||||||
| # 5 | Net Income | = | EBIT | - | Interest Expense | - | Tax Expense |
| = | $ 200 | - | $ 16.00 | - | $ 73.60 | ||
| = | $ 110.41 | ||||||
| # 6 | Equity | = | Total assets | - | Total debt | ||
| = | $ 1,000 | - | $ 350 | ||||
| = | $ 650 | ||||||
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