Indiana packaging\'s ROE last year was only 3 percent, but its management has de
ID: 2677872 • Letter: I
Question
Indiana packaging's ROE last year was only 3 percent, but its management has developed a new operating plan designed to improve things. THe new plan calls for a total debt ratio of 60 percent, which will result in interest charges of 300$ per year. Management projects an EBIT of 1000$ on sales of 10,000$, and it expects to have a total assets turnover ratio of 2.0. Under these conditions, the average tax rate will be 30 percent. If the changes are made, what return on equity (ROE) will Indiana earn? What is the ROA?Explanation / Answer
Sales/Asset =2.0. Asset =10,000/2 =5,000 Net income =(1000$ -300$)*(1-30%) =$490 ROA =490/5,000 =9.80% Equity = 40%*5,000 = 2000 ROE =$490/2000 =24.50%