INVESTMENTS(LL)W/CONNECT
11th Edition
ISBN: 9781260433920
Author: Bodie
Publisher: McGraw-Hill Publishing Co.
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Chapter 19, Problem 14PS
Summary Introduction
To calculate: The ROE of the firm with the given data.
Introduction:
The
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What is the firm roe ? Accounting
A firm has a tax burden ratio of .75, a leverage ratio of 1.25, an interest burden of .6, and a return on sales of 10%. The firm generates $2.40 in sales per dollar of assets. What is the firm’s ROE?
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Chapter 19 Solutions
INVESTMENTS(LL)W/CONNECT
Ch. 19 - Prob. 1PSCh. 19 - Prob. 2PSCh. 19 - Prob. 3PSCh. 19 - Prob. 4PSCh. 19 - Prob. 5PSCh. 19 - Prob. 6PSCh. 19 - Prob. 7PSCh. 19 - Prob. 8PSCh. 19 - Prob. 9PSCh. 19 - Prob. 10PS
Ch. 19 - Prob. 11PSCh. 19 - Prob. 12PSCh. 19 - Prob. 13PSCh. 19 - Prob. 14PSCh. 19 - Prob. 15PSCh. 19 - Prob. 16PSCh. 19 - Prob. 1CPCh. 19 - Prob. 2CPCh. 19 - Prob. 3CPCh. 19 - Prob. 4CPCh. 19 - Prob. 5CPCh. 19 - Prob. 6CPCh. 19 - Prob. 7CPCh. 19 - Prob. 8CPCh. 19 - Prob. 9CPCh. 19 - Prob. 10CPCh. 19 - Prob. 11CPCh. 19 - Prob. 12CPCh. 19 - Prob. 13CP
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- A firm has a tax burden of 0.7. a leverage ratio of 1.3, an interest burden of .8, and a return-on-sales ratio of 10%. The firm generates $2.78 in sales per dollar of assets. What is the firm's ROE? A. 16.6% B. 12.4% C. 14.5% D. 20.2%arrow_forwardA firm has a tax burden ratio of 0.85, a leverage ratio of 1.5, an interest burden of 0.9, and a return on sales of 12%. The firm generates $2 in sales per dollar of assets. What is the firm's ROE? (Do not round intermediate calculations. Round your answer to 2 decimal place.) ROE %arrow_forwardNonearrow_forward
- A firm has a net profit/pre-tax profit ratio of 0.60, a leverage ratio of 2.0, a pre-tax profit/EBIT ratio of 0.60, an asset turnover ratio of 2.50, a current ratio of 1.50 and a return on sales ratio of 4.00%. The firm's ROE isarrow_forwardAssume that your firm has a return on assets of 14.7% , sales of $16,625,000, total assets of $4,750,000, a return on equity of 36.75%, an interest rate on total debt of 10 percent, and a tax rate of 40 percent. Given this information, determine the firm's basic earnings power. (Hint: you may need to work an income statement backwards to get EBIT, in which case you will need to determine the firm's net income or profit, as well as its interest expense on total debt.)arrow_forwardA firm has EBIT of $30 million. It has debt of $100 million and the cost of debt is 7%. Its unlevered cost of capital is 10% and tax rate at 35%. a) What’s its unlevered firm value? b) What’s its levered firm value? c) What’s its equity value?arrow_forward
- A company has $20 billion of sales and $1 billion of net income. Its total assets are $10 billion. Thecompany’s total assets equal total invested capital, and its capital consists of half debt and halfcommon equity. The firm’s interest rate is 5% and its tax rate is 40%.a. What is its profit margin?b. What is its ROA?c. What is its ROE?d. What is its ROIC?e. Would this firm’s ROA increase if it used less leverage? (The size of the firm does notchange.)arrow_forwardA firm has EBIT of $20,800,000.00, total assets of $100,000,000.00, a tax rate of 40 percent, a cost of debt of 8.0 percent, and a debt/equity ratio of 1.00. As discussed in class, the ROE for a levered firm is also a function of a firm's return on assets (ROA) for an equivalent unlevered firm, plus a leverage effect, plus a tax shelter effect. Given the information above, determine what percentage of the firm's total return on equity arises from the tax shelter effect. Enter your answer is decimal format, rounded to three decimal places. For example, if your answer is 46.55%, enter "0.466".arrow_forwardA firm has EBIT of $15,800,000.00, total assets of $100,000,000.00, a tax rate of 40 percent, a cost of debt of 8.0 percent, and a debt/equity ratio of 1.00. As discussed in class, the ROE for a levered firm is also a function of a firm's return on assets (ROA) for an equivalent unlevered firm, plus a leverage effect, plus a tax shelter effect. Given the information above, determine what percentage of the firm's total return on equity arises from the tax shelter effect.arrow_forward
- Suppose Goodyear Tire and Rubber Company has an equity cost of capital of 7.9%, a debt cost of capital of 6.4%, a marginal corporate tax rate of 21%, and a debt-equity ratio of 2.7. Assume that Goodyear maintains a constant debt-equity ratio. a. What is Goodyear's WACC? b. What is Goodyear's unlevered cost of capital? c. Explain, intuitively, why Goodyear's unlevered cost of capital is less than its equity cost of capital and higher than its WACC. a. What is Goodyear's WACC? The WACC is %. (Round to two decimal places.)arrow_forwardSuppose Goodyear Tire and Rubber Company has an equity cost of capital of 8.1%, a debt cost of capital of 6.6%, a marginal corporate tax rate of 22%, and a debt-equity ratio of 2.5. Assume that Goodyear maintains a constant debt-equity ratio. a. What is Goodyear's WACC? b. What is Goodyear's unlevered cost of capital? c. Explain, intuitively, why Goodyear's unlevered cost of capital is less than its equity cost of capital and higher than its WACC. Question content area bottom a. What is Goodyear's WACC? The WACC is enter your response here%. (Round to two decimal places.)arrow_forwardSuppose Goodyear Tire and Rubber Company has an equity cost of capital of 8.6%, a debt cost of capital of 7.1%, a marginal corporate tax rate of 24%, and a debt-equity ratio of 2.5. Assume that Goodyear maintains a constant debt-equity ratio. a. What is Goodyear's WACC? b. What is Goodyear's unlevered cost of capital? c. Explain, intuitively, why Goodyear's unlevered cost of capital is less than its equity cost of capital and higher than its WACC. Question content area bottom Part 1 a. What is Goodyear's WACC? The WACC is enter your response here%. (Round to two decimal places.)arrow_forward
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