# Finance question…?

Deal Score0

Midwest Packaging’s ROE last year was only 3 percent, but its management has developed a new operating plan that calls for a total debt ratio of 60 percent, which will result in annual interest charges of \$ 300,000. Management projects an 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 percent. If the changes are made, what will be its return on equity?

1 Comment
EJMA (Philippines)
July 21, 2011 at 2:59 am

EBIT \$ 1000000
Interest 300000
Earnings before tax \$ 700000
Tax (34%) \$ 238000
Earnings after interest and taxes \$ 462000

Asset turnover ratio = total revenue / total assets
2 = \$ 10000000 / total assets
Total Assets = \$ 5000000

Equity ratio = 1 – debt ratio
Equity ratio = 40%

Total Equity = equity ratio x total assets
Total equity = 40% x \$ 5000000
Total equity = \$ 2000000

Return on Equity = \$ 462000 / \$ 2000000
Return on Equity = 23.10%

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