Pacific Packaging’s ROE last year was only 5%, but its managementhas developed a new operating plan that calls for a debt-to-capital ratio of 40%, which willresult in annual interest charges of $561,000. The firm has no plans to use preferred stockand total assets equal total invested capital. Management projects an EBIT of $1,258,000 onsales of $17,000,000, and it expects to have a total assets turnover ratio of 2.1. Under theseconditions, the tax rate will be 35%. If the changes are made, what will be the company’sreturn on equity?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Pacific Packaging’s ROE last year was only 5%, but its management
has developed a new operating plan that calls for a debt-to-capital ratio of 40%, which will
result in annual interest charges of $561,000. The firm has no plans to use preferred stock
and total assets equal total invested capital. Management projects an EBIT of $1,258,000 on
sales of $17,000,000, and it expects to have a total assets turnover ratio of 2.1. Under these
conditions, the tax rate will be 35%. If the changes are made, what will be the company’s
return on equity?

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