What Is the ROE for a Firm with Times Interest

question 96

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)44.44%
• B)33.33%
• C)22.22%
• D)11.11% 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

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Definitions:

Internal Controls

Procedures and processes implemented by a company to ensure the integrity of financial and accounting information, promote accountability, and prevent fraud.

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The process of creating, compiling, and maintaining records and detailed information.

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A lawful business structure involving two or more people who jointly manage and share the earnings.

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An independent organization responsible for establishing and improving financial accounting standards in the United States.