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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Definitions:

Incentive Pay

Financial reward given to employees beyond their regular salary, often based on performance criteria, to motivate and encourage higher productivity.

Downside Risk

The potential for loss or negative outcome in an investment or business situation.

Upside Potential

The potential for an investment, company, or project to increase in value or profitability.

Aggregation

The process of combining multiple data sets or information to produce summaries or insights for analysis.