Pacific Packaging\'s ROE last year was only 3%; but its management has developed
ID: 2814630 • 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 $1,000,000. The firm has no plans to use preferred stock and total assets equal total invested capital. Management projects an EBIT of $1,440,000 on sales of $20,000,000, and it expects to have a total assets turnover ratio of 2.4. Under these conditions, the tax rate will be 40%. 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
Total assets turnover ratio of 2.4
Total assets turnover ratio=Net sales/ Total Asset
Total asset =20,000,000/2.4=8333333
debt Ratio=55%
debt =833333*55%=4583333
Equity =8333333-4583333=3750000
Net Income =(EBIT - interest)*(1-T)
=(1,440,000-1,000,000)*(1-.40)
=264000
return on equity=net inome /equity
=264000/3750000
Return on equity=7.04%
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