Question

Sales of 5,000 units at $30 selling price per unit, EBT is 20% of Revenues, taxes at 35%, Debt-to-Equity Ratio of .40 times, Debt of $25,000, What is the ROE

Answer 1

The ROE is 31.2%

Step-by-step explanation:

Revenues = 5,000 x $30 = $150,000

EBT (Earnings before tax) is 20% of Revenues, taxes at 35%.

EBT = $150,000 x 20% = $30,000

Earnings after tax = EBT - Tax = EBT - EBT x Tax rate = EBT x (1-Tax rate) = $30,000 x (1-35%) = $19,500

Debt-to-Equity Ratio = Total debt (or liabilities)/Total equity

Total equity = Total debt/Debt-to-Equity Ratio = $25,000/0.40 = $62,500

ROE = Net income/Total equity = Earnings after tax/Total equity = $19,500/$62,500 = 31.2%