Midwest Packaging\'s ROE last year was only 5%; but its management has developed

Question

Midwest Packaging's ROE last year was only 5%; 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 $756,000. The firm has no plans to use preferred stock. Management projects an EBIT of $2,088,000 on sales of $18,000,000, and it expects to have a total assets turnover ratio of 1.6. 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

ROE= PAT/shareholders equity. PAT= (2088000-756000)x.6= $799200 Asset turnover= sales/Total asset 1.6= 18000000/TA TA= 11250000 debt/asset = .4 debt= .4x11250000 debt= 450000 Equity= 11250000-450000= $675000 ROE=799200/675000= 1.184

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