Final answer:
To calculate the ROE for Keller Cosmetics, subtract interest and taxes from EBIT to find the net income, and divide by the equity, assuming a debt-equity ratio of 1. The calculated ROE is 40%, which is not one of the given options.
Step-by-step explanation:
To calculate the Return on Equity (ROE) for Keller Cosmetics, we need to follow specific steps to derive the net income first, and then divide it by the equity. Starting with the provided Earnings Before Interest and Taxes (EBIT) which is $20,000, we subtract the interest payments of $8,000. Following this, we have to account for taxes, which are $4,000. So, the net income is calculated as follows:
Given the debt-equity ratio is 1, equity is equal to the firm's debt. Since the net income is $8,000, and the equity is equal to the debt, and if we assume for simplicity that the debt is $20,000 (which is the same as EBIT), then the equity would also be $20,000. Now, we can calculate the ROE:
ROE = Net Income / Equity
ROE = $8,000 / $20,000
ROE = 0.40 or 40%
The ROE for Keller Cosmetics is therefore 40%, which is not one of the given options, suggesting a possible mistake in the question or that additional information is necessary to provide an accurate answer.