Respuesta :
Answer:
ROE = 16.98%
Explanation:
The question is to determine Amer Company's Return on Equity
The following steps are taken:
1) The Total Debt ÷ Total Assets = 35%
It means Total Debt ÷ 1000= 0.35
Meaning 0.35 x $1,000 = $350 and this is the total debt
2) Calculate Interest on debt
Interest on debt = Interest rate on total debt x total debt
= 4.57% x $350 = $16
3) Now calculate the Net Income from Earnings before Interest and Tax
Earnings before Interest and tax = $200
less interest $16
Earnings Before Tax $184
Subtract tax (40% of EBT) $73.6
Net income $110.4
4) Calculate the Return on Equity
= Net income/ Shareholders' Equity
= $110.4/ ($1,000-$300)
= 16.98%
Amer's Return on Equity is 16.98%.
Here, we are to calculate the Return on Equity. we will first calculate the Total debt.
Total Debt / Total Assets = 35%
Total Debt / $1,000 = 0.35
Total Debt = 0.35 * $1,000
Total Debt = $350
Interest on debt = Interest rate on total debt * Total debt
Interest on debt = 4.57% * $350
Interest on debt = $16
Calculation of the Net Income from Earnings before Interest and Tax.
Particulars Amount
Earnings before Interest and tax $200
Less: interest $16
Earnings Before Tax $184
Less: Tax (40% of $184) $73.6
Net income $110.4
Return on Equity = Net income/ Shareholders' Equity
Return on Equity = $110.4/ ($1,000-$300)
Return on Equity = 16.98%
Therefore, Amer's Return on Equity is 16.98%.
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