Midwest Packaging\'s ROE last year was only 6%; but its management has developed
ID: 2659911 • Letter: M
Question
Midwest Packaging's ROE last year was only 6%; but its management has developed a new operating plan that calls for a debt-to-assets ratio of 40%, which will result in annual interest charges of $272,000. The firm has no plans to use preferred stock. Management projects an EBIT of $880,000 on sales of $8,000,000, and it expects to have a total assets turnover ratio of 3.2. Under these conditions, the tax rate will be 40%. If the changes are made, what will be the company's return on equity? Round your answer to two decimal places.
Explanation / Answer
ASSETS TO TURNOVER RATIO = 3.2
ASSETS TURNOVER RATIO= SALES/TOTAL ASSETS
3.2 = 8000000/TOTAL ASSETS
TOTAL ASSETS = 2500000
DEBT = 40% OF 2500000
=1000000
EQUITY = 2500000-1000000
=1500000
NET INCOME =[EBIT-INTEREST]*(1-T)
=[880000-272000]*0.60
=364800
COMPANY