What Is the ROE for a Firm with Times Interest

question 37

Multiple Choice

What is the ROE for a firm with times interest earned ratio of 2, a tax liability of $1 million, and interest expense of $1.5 million if equity equals $1.5 million?

• A)-33.33 percent
• B)30.00 percent
• C)33.33 percent
• D)50.00 percent Times interest earned = EBIT/interest = 2
• Therefore, EBIT = 3 million because interest = $1.5 million
• Net income = EBIT - interest - taxes
• = $3 million - $1.5 million - $1 million
• = $)5 million
• ROE = net income/equity
• = $)5 million/$1.5 million

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