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7 May, 09:31

Wizard Co. is a small company and is considering a project that will require $550,000 in assets. The project will be financed with 100% equity. The company faces a tax rate of 25%. What will be the ROE (return on equity) for this project if it produces an EBIT (earnings before interest and taxes) of $155,000?

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  1. 7 May, 11:57
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    The ROE (return on equity) for this project will be 21.14%

    Explanation:

    Return on equity (ROE) is calculated by using following formula:

    Return on Equity = (Net Income / Average Shareholders' Equity) x100%

    In Wizard Co.:

    The project will require $550,000 in assets and will be financed with 100% equity. Average Shareholders' Equity is $550,000 and Interest expense is $0.

    The project produces an EBIT of $155,000, tax rate of 25%

    Net income = $155,000 - Tax amount = $155,000 - 25% x $155,000 = $116,250

    ROE = ($116,250/$550,000) x100% = 21.14%
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