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19 May, 19:34

Universal Exports Inc. 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 35%. what will be the ROE (return on equity) for this project if it produces an EBIT (earnings before interest and taxes) of $140,000? 13.0% 9.8% 9.1%

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  1. 19 May, 20:11
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    13%

    Explanation:

    Given that,

    Investment (100% equity) = $700,000

    EBIT = $140,000

    Tax rate = 35%

    Earnings after tax:

    = Investment (100% equity) + Earnings before interest and taxes - Tax (35%)

    = $700,000 + $140,000 - ($140,000 * 0.35)

    = $840,000 - $49,000

    = $91,000

    ROE = Earnings after tax : Investment

    = $91,000 : $700,000

    = 13%
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