Your sister is thinking about starting a new business. The company would require $300,000 of assets,...

Your sister is thinking about starting a new business. The company would require $300,000 of assets, and it would be financed entirely with common stock. She will go forward only if she thinks the firm can provide a 13.5% return on the invested capital, which means that the firm must have an ROE of 13.5%. How much net income must be expected to warrant starting the business?

a. $33,210

b. $40,500

c. $41,310

d. $44,145

Expert Solution

ROE = Net Income / Equity

As the company is financed by common equity,
total assets = Equity

Net Icome = ROE * Equity
= $300000*13.5%
= $40500

Therefore, option b is the correct answer.

jeff jeffy answered 2 years ago

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