A firm has EBIT of $15 million,interest expense of $1 million,and pays taxes of $4 million.The firm has a market-to-book ratio of 5.75.If the firm has 30 million shares outstanding at a current price of $12 per share,what is its ROE?
A)24%
B)2.8%
C)16%
D)4.2%
E)18%

Question

Quizplus · Accepted Answer

First, we need to calculate the net income:

EBIT = $15 million
Interest expense = $1 million
EBT = EBIT - Interest = $14 million
Taxes = $4 million
Net income = EBT - Taxes = $10 million

Next, we need to calculate the book value of equity:

Market-to-book ratio = 5.75
Book value per share = Current price per share / Market-to-book ratio = $12 / 5.75 = $2.09
Book value of equity = Book value per share * Number of shares outstanding = $2.09 * 30 million = $62.7 million

Finally, we can calculate the ROE:

ROE = Net Income / Book Value of Equity = $10 million / $62.7 million = 0.160 or 16%

A Firm Has EBIT of $15 Million,interest Expense of $1