lemongrass
|
To answer this question, you first have to find out the interest charges and tax expense. Then you will get the Net Profit which will be used to find the ROE.
The amount of debt = 50% x $2,000,000 = $1,000,000
Interest = 12% x $1,000,000 = $120,000
Earnings after interest = $400,000 - $120,000 = $280,000
Tax expense = 40% x $280,000 = $112,000
Net profit = $280,000 - $112,000 =$168,000
Equity = Total Assets - Total Debt = $2,000,000 - $1,000,000 = $1,000,000
ROE = ($168,000 / $1,000,000) x100% = 16.8%
*edited: Thank you Mustafa for spotting my mistake. Did the calculations too fast cos I was answering during working hours. |
Mustafa M
 |
I agree with lemongrass till the last step. However, the last step should be :
Net profit = $280,000 - $112,000 = 168,000
ROE = ($168,000 / $1,000,000) x100% = 16.8% |
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