Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Consider a firm with $100 million of operating net assets (PP&E, inventory, etc., net of accounts payable, etc.). It generates annual operating earnings of $20
Consider a firm with $100 million of operating net assets (PP&E, inventory, etc., net of accounts payable, etc.). It generates annual operating earnings of $20 million. Consider debt at 20%, 40% and 60% of total capital. Interest rate on borrowings is 8%. The firm has no debt. The tax rate is 21%.
Can someone show steps on how Return on Equity is calculated from the table? Would be appreciated, thank you
(in millions of $) Operating net assets $100.0 $100.0 $100.0 $100.0 Debt Common equity $0.0 100.0 $100.0 $20.0 80.0 $100.0 $40.0 60.0 $100.0 $60.0 40.0 $100.0 Operating earnings Interest expense Pretax income Income taxes (21%) Net income $20.000 $20.000 $20.000 $20.000 0.000 (1.600) (3.200) (4.800) 20.000 18.400 16.800 15.200 (4.200) (3.864) (3.528) (3.192) $15.800 $14.536 $13.272 $12.008 Net income Common equity Return on equity $15.800 $14.536 $13.272 $12.008 100.0 80.0 60.0 40.0 15.80% 18.17% 22.12% 30.02%Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started