Company KT expects to have operating profit of $940 million and average total assets of $3600 million in the next year. The companys debt/total assets ratio is expected to be maintained at 30%. Suppose that the interest rate and corporate income tax are respectively 10% and 40%.

Requirement:

a. Calculate the companys expected return on equity (ROE) ratio in the next year. (ROE = Net income / Average owners equity)

b. Suppose the company increases its D/A ratio to 50%. How may this action affect its expected ROE in the next year? Given that the companys expected average total assets, operating profit, interest rate and corporate income tax rate remain unchanged