Question

Your sister is thinking about starting a new business. the company would require $425,000 of assets, and it would be financed entirely with common stock. she will go forward only if she thinks the firm can provide a 13.5% return on the invested capital, which means that the firm must have an roe of 13.5%. how much net income must be expected to warrant starting the business? group of answer choices

O $49,916
O $63,686
O $66,555
O $57,375

Answer 1

The correct option is 4. To achieve a 13.5% return on equity for a new business requiring $425,000 in assets, a net income of $57,375 is needed.

Step-by-step explanation:

To calculate the net income required to achieve an expected return on equity (ROE) of 13.5% for the new business, we can use the formula ROE = Net Income / Shareholder's Equity. Since the business will be financed entirely with common stock, Shareholder's Equity is equivalent to the total assets required to start the business, which is $425,000. Setting up the equation with the ROE of 13.5% gives us:

0.135 = Net Income / 425,000

By solving for Net Income, we multiply both sides by $425,000:

Net Income = 0.135 × 425,000

Net Income = $57,375

Hence, to warrant starting the business with an expectation of a 13.5% ROE, a net income of $57,375 must be expected.