What is the ROE for a firm with 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?
A)-33.33 percent
B)30.00 percent
C)33.33 percent
D)50.00 percent Times interest earned = EBIT/interest = 2
Therefore, EBIT = 3 million because interest = $1.5 million
Net income = EBIT - interest - taxes
= $3 million - $1.5 million - $1 million
= $)5 million
ROE = net income/equity
= $)5 million/$1.5 million

Question

Quizplus · Accepted Answer

The first step is to calculate the net income by using the formula:

Net income = EBIT - Interest - Taxes

We are given that the times interest earned ratio is 2, so we can use the formula:

Times interest earned = EBIT / Interest

2 = EBIT / 1.5 million

EBIT = 3 million

Next, we can calculate the net income:

Net income = 3 million - 1.5 million - 1 million = 500,000

Finally, we can calculate the ROE using the formula:

ROE = Net income / Equity

ROE = 500,000 / 1.5 million = 0.3333 or 33.33%

Therefore, the answer is C (33.33%).

What Is the ROE for a Firm with Times Interest