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24 July, 07:25

The Amer Company has the following characteristics: Sales = $1,000, Total assets = $1,000. Total debt/Total assets = 35%, Basic Earning Power (BEP) ratio = 20%, Tax rate = 40%, Interest rate on total debt = 4.57%. What is Amer's ROE?

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  1. 24 July, 08:29
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    ROE = 16.98%

    Explanation:

    The question is to determine Amer Company's Return on Equity

    The following steps are taken:

    1) The Total Debt : Total Assets = 35%

    It means Total Debt : 1000 = 0.35

    Meaning 0.35 x $1,000 = $350 and this is the total debt

    2) Calculate Interest on debt

    Interest on debt = Interest rate on total debt x total debt

    = 4.57% x $350 = $16

    3) Now calculate the Net Income from Earnings before Interest and Tax

    Earnings before Interest and tax = $200

    less interest $16

    Earnings Before Tax $184

    Subtract tax (40% of EBT) $73.6

    Net income $110.4

    4) Calculate the Return on Equity

    = Net income / Shareholders' Equity

    = $110.4 / ($1,000-$300)

    = 16.98%
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Home » Business » The Amer Company has the following characteristics: Sales = $1,000, Total assets = $1,000. Total debt/Total assets = 35%, Basic Earning Power (BEP) ratio = 20%, Tax rate = 40%, Interest rate on total debt = 4.57%. What is Amer's ROE?
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