The ROE of the Midwest Corporation last year was only 3%. [Note: This information is irrelevant in this problem] This year, its management would like to have a 60% debt-to-assets ratio, which would result in the annual interest expense of $300,000. The company’s management projects the EBIT of $1,000,000 on the total Sales of $10,000,000. They expect to have the total asset turnover ratio of 2. Under these conditions, the corporate tax rate will be 34%. If the changes are made, calculate the firm’s return on equity in the current year.

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter18: The Management Of Accounts Receivable And Inventories
Section: Chapter Questions
Problem 10P
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  • The ROE of the Midwest Corporation last year was only 3%. [Note: This information is irrelevant in this problem]
  • This year, its management would like to have a 60% debt-to-assets ratio, which would result in the annual interest expense of $300,000.
  • The company’s management projects the EBIT of $1,000,000 on the total Sales of $10,000,000.
  • They expect to have the total asset turnover ratio of 2.
  • Under these conditions, the corporate tax rate will be 34%.
  • If the changes are made, calculate the firm’s return on equity in the current year.
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