The Amer Company has the following characteristics:
Sales:$1,000
Total Assets:$1,000
Total Debt/Total Assets:35%
EBIT:$200
Tax rate:40%
Interest rate on total debt:4.57%
What is Amer's ROE?
A) 11.04%
B) 12.31%
C) 16.99%
D) 28.31%
E) 30.77%

Question

Quizplus · Accepted Answer

To calculate ROE, first find Net Income: EBIT - Interest - Taxes. Interest = Total Debt * Interest Rate = $350 * 4.57% = $15.995. Taxes = (EBIT - Interest) * Tax Rate = ($200 - $15.995) * 40% = $73.602. Net Income = $200 - $15.995 - $73.602 = $110.403. Equity = Total Assets - Total Debt = $1,000 - $350 = $650. ROE = Net Income / Equity = $110.403 / $650 = 16.99%.

The Amer Company Has the Following Characteristics