What is the ROE for a firm with a times interest earned ratio of 2, a tax liability of $1 million, and interest expense of $1.5 million if equity equals $1.5 million? (Use the values in dollars)
A)26.67%
B)30.00%
C)33.33%
D)50.00%

Question

Quizplus · Accepted Answer

ROE = Net Income/Equity

To find Net Income, we need to start with EBIT (earnings before interest and taxes), which is calculated by multiplying the times interest earned ratio by interest expense:

EBIT = Times Interest Earned Ratio * Interest Expense
EBIT = 2 * $1.5 million
EBIT = $3 million

Next, we need to subtract the tax liability to get the net income:

Net Income = EBIT - Taxes
Net Income = $3 million - $1 million
Net Income = $2 million

Now we can calculate the ROE:

ROE = Net Income/Equity
ROE = $2 million / $1.5 million
ROE = 1.33 or 33.33%

Therefore, the answer is (C) 33.33%.

What Is the ROE for a Firm with a Times