Question

RETURN ON EQUITY

Pacific Packaging's ROE last year was only 2%; but its management has developed a new operating plan that calls for a debt-to-capital ratio of 40%, which will result in annual interest charges of $132,000. The firm has no plans to use preferred stock and total assets equal total invested capital. Management projects an EBIT of $448,000 on sales of $4,000,000, and it expects to have a total assets turnover ratio of 2.5. Under these conditions, the tax rate will be 40%. If the changes are made, what will be the company's return on equity? Do not round intermediate calculations. Round your answer to two decimal places.

= %

Answer 1

	Total Asset turnover ratio =			Sales/ Average assets=			2.5
			=	4000000/Average total asset =			2.5
			=	Average Total asset =		4000000/2.5
			=	Average Total asset =		1600000
	Return on equity =		Net Income / Shareholder's equity x 100 =
	Net Income =
	EBIT			448000
	Less: Interest			132000
	EBT			316000
	Less: Tax @ 40%			126400
	Net Income			189600
	Shareholder's Equity =		total assets x (1- 0.4 ) =		1600000 x 0.6
				=	960000
	ROE =	189600/960000 x 100			19.75%
	Please provide feedback…. Thanks in advance…. :-)