Charlie is thinking about starting a new business. The company would require $375,000 of assets, and it would be financed entirely with common stock. He will go forward only if he thinks the firm can provide a 11.5% return on the invested capital, which means that the firm must have an ROE of 11.5%. How much net income must be expected to warrant starting the business

Question

Ryan Ashley

Business

24 December, 16:21

Charlie is thinking about starting a new business. The company would require $375,000 of assets, and it would be financed entirely with common stock. He will go forward only if he thinks the firm can provide a 11.5% return on the invested capital, which means that the firm must have an ROE of 11.5%. How much net income must be expected to warrant starting the business

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Cristina Morales · Answer 1

The income must be $43,125 to warrant starting the business

Explanation:

Given that:

ROE of 11.5% The company would require $375,000 of assets, and it would be financed entirely with common stock, it is the equity

The formula of ROE : Net income / Equity

Therefore, Net income = ROE * Equity

= 11.5% * $375,000

= $43,125

So the income must be $43,125 to warrant starting the business

Hope it will find you well.