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Return on equity West Packaging's ROE last year was only 3%, but its management has developed a new operating plan that calls for a total debit ratio of 60%, which will result in annual interest charges of $300,000. Management project and EBIT of $1,000,000 on sales of $10,000,000 and it expects to have a total assets turnover ratio of 2.0. Under these conditions, the tax rate will be 34%. If the changes are made, what will be its return on equity?

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Solution Summary

The solution explains how to calculate the return on equity after the given changes are made

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Total asset turnover = sales/assets = 2.0
Assets = sales/2.0 = 10,000,000/2 = 5,000,000
Debt ratio = ...

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