Pacific Packaging\'s ROE last year was only 4%; but its management has developed
ID: 2621084 • Letter: P
Question
Pacific Packaging's ROE last year was only 4%; but its management has developed a new operating plan that calls for a debt-to-capital ratio of 40%, which will result in annual interest charges of $258,000. The firm has no plans to use preferred stock and total assets equal total invested capital. Management projects an EBIT of $510,000 on sales of $6,000,000, and it expects to have a total assets turnover ratio of 1.4. 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
total assets = 6,000,000/1.4
equity = 0.60 * 6,000,000/1.4 = 2,571,428.57
net income = (510,000 - 258,000)*0.65 = 163,800
return on equity = 163,800/2,571,428.57 = 6.37%
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