Question

Universal Exports Inc. is considering a project that will require $700,000 in assets. The project will be financed with 100% equity. The company faces a tax rate of 35%. what will be the ROE (return on equity) for this project if it produces an EBIT (earnings before interest and taxes) of $140,000? 13.0% 9.8% 9.1%

Answer 1

13%

Step-by-step explanation:

Given that,

Investment (100% equity) = $700,000

EBIT = $140,000

Tax rate = 35%

Earnings after tax:

= Investment (100% equity) + Earnings before interest and taxes - Tax (35%)

= $700,000 + $140,000 - ($140,000 × 0.35)

= $840,000 - $49,000

= $91,000

ROE = Earnings after tax ÷ Investment

= $91,000 ÷ $700,000

= 13%