Assume that your company recently reported net income of $2,100,000, a tax rate of 40 percent, had interest expense of $400,000 on $10,000,000 of debt, and a return on assets (ROA) of 7 percent. Also assume that the firm's board of directors would like to increase sales, decrease costs, and double its basic earnings power (BEP) ratio, while maintaining the tax rate and the level of debt, equity, and interest expense. Given this information, determine what the company's new return on equity will be if the firm can double its basic earnings power ratio. (HINT: you will need to work backwards through the income statement to get EBIT, then forward under new assumption to get net income) O 16.62% O 14.76% O 22.20% O 24.06% O 18.48%
Assume that your company recently reported net income of $2,100,000, a tax rate of 40 percent, had interest expense of $400,000 on $10,000,000 of debt, and a return on assets (ROA) of 7 percent. Also assume that the firm's board of directors would like to increase sales, decrease costs, and double its basic earnings power (BEP) ratio, while maintaining the tax rate and the level of debt, equity, and interest expense. Given this information, determine what the company's new return on equity will be if the firm can double its basic earnings power ratio. (HINT: you will need to work backwards through the income statement to get EBIT, then forward under new assumption to get net income) O 16.62% O 14.76% O 22.20% O 24.06% O 18.48%
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Bhupat bhai
Transcribed Image Text:Assume that your company recently reported net income of $2,100,000, a tax rate of 40
percent, had interest expense of $400,000 on $10,000,000 of debt, and a return on assets
(ROA) of 7 percent. Also assume that the firm's board of directors would like to increase
sales, decrease costs, and double its basic earnings power (BEP) ratio, while maintaining the
tax rate and the level of debt, equity, and interest expense. Given this information, determine
what the company's new return on equity will be if the firm can double its basic earnings
power ratio. (HINT: you will need to work backwards through the income statement to get
EBIT, then forward under new assumption to get net income)
O 16.62%
O 14.76%
O 22.20%
O 24.06%
O 18.48%
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