Question

Wizard Co. is a small company and is considering a project that will require $550,000 in assets. The project will be financed with 100% equity. The company faces a tax rate of 25%. What will be the ROE (return on equity) for this project if it produces an EBIT (earnings before interest and taxes) of $155,000?

Answer 1

The ROE (return on equity) for this project will be 21.14%

Step-by-step explanation:

Return on equity (ROE) is calculated by using following formula:

Return on Equity = (Net Income / Average Shareholders’ Equity )x100%

In Wizard Co.:

The project will require $550,000 in assets and will be financed with 100% equity. Average Shareholders’ Equity is $550,000 and Interest expense is $0.

The project produces an EBIT of $155,000, tax rate of 25%

Net income = $155,000 - Tax amount = $155,000 - 25% x $155,000 = $116,250

ROE = ($116,250/$550,000)x100% = 21.14%

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