Question

Ziff Corp. 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 30%. what will be the ROE (return on equity) for this project if it produces an EBIT (earnings before interest and taxes) of $160,000? a. 17.6% b. 11.2% c. 16.0% d. 16.8%

Answer 1

c. 16%

Step-by-step explanation:

The formula and the computation of the return on equity is shown below:

Return on Equity = Net income ÷ Equity

where,

Net income = (1 - tax rate) × Earning before Interest and taxes

= (1 - 0.30) × $160,000

= $112,000

And, the equity is $700,000 × 100% = $700,000

So, the return on equity is

= $112,000 ÷ $700,000

= 16%