Hernandez Corporation expects to have the following data during the coming year.What is Hernandez's expected ROE? $$\begin{array} { l c }
\text { Assets } & \$ 200,000 \text { Interest rate } &8\%\
\mathrm { D } / \mathrm { A } & 65 \% \text { Tax rate }&\%40 \
\text { EB IT } & \$ 25,000
\end{array}$$
A)12.51%
B)13.14%
C)13.80%
D)14.49%
E)15.21%

Question

Hernandez Corporation expects to have the following data during the coming year.What is Hernandez's expected ROE? $$\begin{array} { l c } 
\text { Assets } & \$ 200,000 \text { Interest rate } &8\%\
\mathrm { D } / \mathrm { A } & 65 \% \text { Tax rate }&\%40 \
\text { EB IT } & \$ 25,000
\end{array}$$
A)12.51%
B)13.14%
C)13.80%
D)14.49%
E)15.21%

Quizplus · Accepted Answer

The correct answer is A because the expected ROE is 12.51%. The calculation is as follows:ROE = (Net Income / Assets) x (1 - Tax Rate)Net Income = EBIT x (1 - Interest Rate) x (1 - Tax Rate)Net Income = $25,000 x (1 - 0.08) x (1 - 0.40)Net Income = $12,500ROE = ($12,500 / $200,000) x (1 - 0.40)ROE = 12.51%

Hernandez Corporation Expects to Have the Following Data During the Coming