Question

Three Waters Co. is a small company and is considering a project that will require $700,000 in assets. The project will be financed with 100% equity. The company faces a tax rate of 25%. What will be the ROE (return on equity) for this project if it produces an EBIT (earnings before interest and taxes) of $140,000? 15.75% 11.25% 15.00% 10.50%

Answer 1

ROE 15%

Step-by-step explanation:

Given data:

Total assets is $700,000

percentage of equity is 100%

tax rate is 25%

return on equity is given as

ROE = Net Income/ Total equity

net income is given as

`Net\ Income = EBIT * (1 - tax\ rate)`

= 140,000*(1 - 0.25) = 105,000

Total equity is equal to Total assets = 600,000

plugging all value to get ROE value

`ROE = (105,000)/(600,000)`

= 0.15 = 15.00% (Option c)

Answer 2

15.00%

Step-by-step explanation:

The formula to compute the return on equity is shown below:

Return on equity = (EBIT × 1 - tax rate) ÷ (total equity)

= ($140,000 × 0.75) ÷ ($700,000)

= ($105,000) ÷ ($700,000)

= 15%

It shows a relationship between the earning after tax and total equity in respect of assets required for the project so that the accurate return can come