Question

Charlie is thinking about starting a new business. The company would require $375,000 of assets, and it would be financed entirely with common stock. He will go forward only if he thinks the firm can provide a 11.5% return on the invested capital, which means that the firm must have an ROE of 11.5%. How much net income must be expected to warrant starting the business

Answer 1

$43,125.

Step-by-step explanation:

Since the assets will would be financed entirely with common stock, it implies that assets is equal to common stock as follows:

Assets is equal = Common stock = $375,000

Also,

Return on equity (ROE) is the ratio of net income to the equity which is also known as common stock. Therefore, ROE can be stated as follows:

ROE = Net income/Equity = 11.5%

Since,

Equity refers to Common stock = $375,000;

We can calculate the net income using the ROE formula stated above as follows:

Net income/$375,000 = 11.5%

Net income = 11.5% × $375,00 = $43,125

Therefore, the amount of net income must be expected to warrant starting the business is $43,125.

Answer 2

The income must be $43,125 to warrant starting the business

Step-by-step explanation:

Given that:

• ROE of 11.5%

• The company would require $375,000 of assets, and it would be financed entirely with common stock, it is the equity

The formula of ROE : Net income / Equity

Therefore, Net income = ROE * Equity

= 11.5% * $375,000

= $43,125

So the income must be $43,125 to warrant starting the business

Hope it will find you well.