Laserscope Inc. is trying to determine the best combination of short-term and long-term debt to employ in financing its assets. Laserscope will have $16 million in current assets and $20 million in fixed assets next year and expects operating income (EBIT) to be $4.1 million. The company's tax rate is 40%, and its debt ratio is 50%. The firm's debt will be financed by one of the following policies: $\begin{array}{lcll}& \text { Amount of } & \text { Interestrate } \
\text { Financing policy } & \text { Short-term debt } & \text { LTD }(\%) & \text { STD }(\%)\
\text { Aggressive } & \$ 12 & 11.0 & 7.5 \
\text { Conservative } & 6 & 10.3 & 7.0
\end{array}$ ? What is the return on shareholder's equity under each policy?

Question

Quizplus · Accepted Answer

The return on equity (ROE) is calculated by dividing net income by equity. For both policies, calculate interest expense, subtract from EBIT to get taxable income, then calculate net income after taxes. Finally, divide by equity (50% of total assets) to find ROE.

Laserscope Inc ? What Is the Return on Shareholder's Equity Under Each