A firm has total assets of $1,000,000 and a debt ratio of 30 percent. Currently, it has sales of $2,500,000, total fixed costs of $1,000,000, and EBIT of $50,000.  If the firm's before-tax cost of debt is 10 percent and the firm's tax rate is 40 percent, what is the firm's ROE?

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Asked Aug 24, 2019
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A firm has total assets of $1,000,000 and a debt ratio of 30 percent. Currently, it has sales of $2,500,000, total fixed costs of $1,000,000, and EBIT of $50,000.  If the firm's before-tax cost of debt is 10 percent and the firm's tax rate is 40 percent, what is the firm's ROE?
 
 

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Step 1

Return on equity (ROE):

It is a profitability measure that is related with the firm's equity. It is used mainly to compare the firm's performance within the same industry. ROE indicates the efficient usage of investment by the firm to generate growth in the earnings.

Step 2

Computation of Return on Equity (ROE):

Hence, the firm's ROE is 1.71%...

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Particulars 2 Total assets 3 Debt percent 4 Total debt Amount $1,000,000 30% $300,000 $700,000 1 5 Total equity 6 EBIT $50,000 10% $20,000 7 Cost of debt 8 PBT (Profit Before Tax) 9 Tax rate 40% $12,000 1.71% 10 Net income 11 Return on equity

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