Midwest Packaging\'s ROE last year was only 6%; but its management has developed

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 55%, which will result in annual interest charges of $352,000. The firm has no plans to use preferred stock. Management projects an EBIT of $856,000 on sales of $8,000,000, and it expects to have a total assets turnover ratio of 3.6. Under these conditions, the tax rate will be 30%. If the changes are made, what will be the company's return on equity? Round your answer to two decimal places.

Explanation / Answer

new ROE = 856000/8,000,000 * 3.6*0.55 =0.21186 =21.12%(appx) new ROE =21.12%

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