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

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%