Answer:
The ROE (return on equity) for this project will be 21.14%
Explanation:
Return on equity (ROE) is calculated by using following formula:
Return on Equity = (Net Income
/
Average Shareholders’ Equity
)x100%
In Wizard Co.:
The project will require $550,000 in assets and will be financed with 100% equity. Average Shareholders’ Equity is $550,000 and Interest expense is $0.
The project produces an EBIT of $155,000, tax rate of 25%
Net income = $155,000 - Tax amount = $155,000 - 25% x $155,000 = $116,250
ROE = ($116,250/$550,000)x100% = 21.14%
