Assume that your company recently reported net income of $2,200,000, a tax rate of 40 percent, had interest expense of $480,000 on $12,000,000 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 and decrease cost of goods sold, resulting in a 100 percent increase in its basic earnings power (BEP) ratio. The boards also expects the tax rate and cost of debt to remain the same. The board will not change the amount of debt or equity outstanding.
Assume that your company recently reported net income of $2,200,000, a tax rate of 40 percent, had interest expense of $480,000 on $12,000,000 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 and decrease cost of goods sold, resulting in a 100 percent increase in its basic earnings power (BEP) ratio. The boards also expects the tax rate and cost of debt to remain the same. The board will not change the amount of debt or equity outstanding.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
am. 121.
Transcribed Image Text:Assume that your company recently reported net income of $2,200,000, a tax rate
of 40 percent, had interest expense of $480,000 on $12,000,000 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 and decrease cost of goods sold, resulting in a 100
percent increase in its basic earnings power (BEP) ratio. The boards also expects
the tax rate and cost of debt to remain the same. The board will not change the
amount of debt or equity outstanding.
Given this information, determine what the company's new return on equity will be
if the firm can double its basic earnings power ratio.
O 22.30%
O 24.93%
O22.83%
23.44%
O24.13%
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