Southeast Packaging's ROE Last Year Was Only 5 Percent, but Its

question 25

Multiple Choice

Southeast Packaging's ROE last year was only 5 percent, but its management has developed a new operating plan designed to improve things. The new plan calls for a total debt ratio of 60 percent, which will result in interest charges of $8,000 per year. Management projects an EBIT of $26,000 on sales of $240,000, and it expects to have a total assets turnover ratio of 2.0. Under these conditions, the average tax rate will be 40 percent. If the changes are made, what return on equity will Southeast earn?

• A) 9.00%
• B) 11.25%
• C) 17.50%
• D) 22.50%
• E) 35.00%

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Definitions:

Self-Serving Bias

Self-serving bias is the tendency to attribute positive events to one's own character but attribute negative events to external factors, affecting judgment and decision-making.

Planning Fallacy

The optimistic cognitive bias that leads individuals or teams to underestimate the time, costs, and risks of future actions, while overestimating the benefits.

Overconfidence Effect

A cognitive bias where people overestimate their own abilities, knowledge, or predictions.

Behavioral Economics

A branch of economics concerned with understanding how the economic behaviors of individuals and institutions are impacted by factors like psychology, cognition, emotions, culture, and society.