Midwest Packaging\'s ROE last year was only 5%; but its management has developed
ID: 2692093 • Letter: M
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 60%, which will result in annual interest charges of $512,000. The firm has no plans to use preferred stock. Management projects an EBIT of $1,280,000 on sales of $16,000,000, and it expects to have a total assets turnover ratio of 2.2. Under these conditions, the tax rate will be 35%.
If the changes are made, what will be the company's return on equity? Round your answer to two decimal places.
________%
Explanation / Answer
EBIT $1000000 Interest 300000 Earnings before tax $700000 Tax (34%) $238000 Earnings after interest and taxes $462000 Asset turnover ratio = total revenue / total assets 2 = $10000000 / total assets Total Assets = $5000000 Equity ratio = 1 – debt ratio Equity ratio = 40% Total Equity = equity ratio x total assets Total equity = 40% x $5000000 Total equity = $2000000 Return on Equity = $462000 / $2000000 Return on Equity = 23.10%