Ziff Corp. is considering a project that will require $700,000 in assets. The project will be financed with 100% equity. The company faces a tax rate of 30%. what will be the ROE (return on equity) for this project if it produces an EBIT (earnings before interest and taxes) of $160,000? a. 17.6% b. 11.2% c. 16.0% d. 16.8%

Question

Tony Griffith

Business

18 July, 17:08

Ziff Corp. is considering a project that will require $700,000 in assets. The project will be financed with 100% equity. The company faces a tax rate of 30%. what will be the ROE (return on equity) for this project if it produces an EBIT (earnings before interest and taxes) of $160,000? a. 17.6% b. 11.2% c. 16.0% d. 16.8%

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Jessica · Answer 1

c. 16%

Explanation:

The formula and the computation of the return on equity is shown below:

Return on Equity = Net income : Equity

where,

Net income = (1 - tax rate) * Earning before Interest and taxes

= (1 - 0.30) * $160,000

= $112,000

And, the equity is $700,000 * 100% = $700,000

So, the return on equity is

= $112,000 : $700,000

= 16%