Hernandez Corporation expects to have the following data dur

Hernandez Corporation expects to have the following data during the coming year. What is Hernandez\'s expected ROE? Assets 8% 35% $200,000Interest rate DIA EBIT 65%Tax rate $25,000

Solution

Return on Equity [ROE] = [Net Income / Total Equity] x 100

Net Income = [EBIT – Interest on Debt] x [1-Tax Rate]

= [$25,000 – ($130,000 x 8%)] x [1 - 0.35]

= [$25,000 – 10,400] x 0.65

= $9,490

Total Equity = $200,000 x 35% = $70,000

Therefore, Expected ROE = [$9,490 / 70,000] x 100 = 13.56 %

“Henrandez Corporation’s Expected ROE = 13.56%”