Pacific Packaging\'s ROE last year was only 3%; but its management has developed
ID: 2621089 • Letter: P
Question
Pacific Packaging's ROE last year was only 3%; but its management has developed a new operating plan that calls for a debt-to-capital ratio of 55%, which will result in annual interest charges of $180,000. The firm has no plans to use preferred stock and total assets equal total invested capital. Management projects an EBIT of $308,000 on sales of $4,000,000, and it expects to have a total assets turnover ratio of 3.0. Under these conditions, the tax rate will be 35%. If the changes are made, what will be the company's return on equity? Do not round intermediate calculations. Round your answer to two decimal places.
Explanation / Answer
assets = 4,000,000/3
equity = 0.45 * 4,000,000/3 = 600,000
net income = (308,000 - 180,000)*0.65 = 83,200
return on equity = 83,200/600,000 = 13.87%
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