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Dramayo, John Harold Beltran Bsa Ii: Given

Roland & Company has implemented a new operating plan to improve its return on equity (ROE) from last year. The plan sets the debt ratio at 55% which will result in $7,000 in annual interest charges. EBIT is projected to be $25,000 on $270,000 in sales, with a total asset turnover ratio of 3.0. The average tax rate will be 40%. Given these figures, Roland & Company expects its ROE to be 26.27% under the new plan.

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189 views2 pages

Dramayo, John Harold Beltran Bsa Ii: Given

Roland & Company has implemented a new operating plan to improve its return on equity (ROE) from last year. The plan sets the debt ratio at 55% which will result in $7,000 in annual interest charges. EBIT is projected to be $25,000 on $270,000 in sales, with a total asset turnover ratio of 3.0. The average tax rate will be 40%. Given these figures, Roland & Company expects its ROE to be 26.27% under the new plan.

Uploaded by

Harold Beltran Dramayo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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DRAMAYO, JOHN HAROLD BELTRAN BSA II

10. 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, it expects
to have a total assets turnover ratio of 3.0, and the average tax rate will be 40 percent. What does
Roland & Company expect its return on equity to be following the changes?

ANSWER:

GIVEN

Debt Ratio= 55%

Interest Expenses=7,000/year

EBIT=25,000

Sales= 270,000

Total Asset Turnover= 3.0

Average Tax Rate=40%

Asset Turnover= Net Sales/ Average Total Assets

3.0=270,000/Total Asset

Total Asset=270,000/3.0

Total Asset=90,000

Debt Ratio= Total Liabilities/ Total Assets

55%=Total Liabilities/90,000

Total Liabilities=55% * 90,000


Total Liabilities= 49,500

Shareholders' Equity= Total Assets - Total Liabilities

Equity= 90,000-49,500

Equity= 40,500

Net Income= IBET-Interest-Tax

Net Income= 25,000- 7,000- 40%

Net Income= 18,000- 40%

Net Income= 10,800

ROE= NET INCOME/AVERAGE EQUITY

ROE= 10,800/40,500

ROE= 26.27%

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