Question

Confu Inc. expects to have the following data during the coming year. The company is small, so it is not subject to the interest deduction limitation. What is the firm's expected ROE?

a. Capital $155,000
b. Interest rate 8%
c. Debt/Capital, book value 65%
d. Tax rate 25%
e. EBIT $25,000

Answer 1

Answer:

23.42%

Explanation:

EBIT = 25,000

EBT = EBIT - Interest

       = 25,000  - ($155,000 × 65% × 8%)

       = $25,000 - $8,060

       = $16,940

Net income = EBT × (1 - Tax)

                    = $16,940 × (1 - 0.25)

                    = $12,705

Shareholder's Equity = capital  × (1 - Debt/Capital)

                                   =  $155,000 × (1 - 0.65)

                                   =  $54,250

Equity = Net income ÷ Shareholder's Equity

          = ($12,705 ÷ $54,250) × 100

          = 0.2342 × 100

          = 23.42%

Answer 2

The expected ROE, that is Return on Equity is the profitability measurement tool that helps to measure the level of earnings from the total amount of equity held by the business in a particular financial period.

The expected ROE for Confu Inc. is 23.42%

The computation of ROE is shown in the image attached below.

Working Note:

Computation of shareholders' equity:

$\text{Shareholder's Equity} = \text{Capital} \times(1 -\text{Debt/Capital})\\= \ 155,000 \times(1 - 0.65) = \ 54,250$

To know more about Return on Equity, refer to the link:

https://brainly.com/question/4298617