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Return on Equity

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Roland & Company has a new management team that has developed an operating plan to improve upon last year's ROE. The new plan would place the debt ratio at 55 percent which will result in interest charges of $7,000 per year. EBIT is projected to be $25,000 on sales of $270,000, and it expects to have a total assets turnover ratio of 3.0. The average tax rate will be 40 percent. What does Roland & Company expect return on equity to be following the changes?

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Solution Summary

The solution explains how the calculate the change in the return on equity given changes made to debt ratio, asset turnover and EBIT.

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Return on Equity=Net Income/Total Equity
First let us calculate the net income
EBIT =25,000
Interest= 7,000
Income before tax = 18,000
Tax (40%)=7,200
Net ...

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