ROE=8% EBIT=12million,tax 29% interest=2million debt=25mWhat is the company’s expected debt-equity ratio?
Colin Clothing Co. Ltd has appointed a new CEO due to experiencing lower returns in the past years. Its ROE had fallen to 8% for the first time in its history. The company expects its operating income (EBIT) to be R12 million and sales revenue is expected to be R80 million for coming year. The company’s asset turnover is expected to be 1.6 times and the company is expected to pay R2 million in interest on a debt level of R25 million. The asset turnover is on the basis of non-current assets plus net working capital. The corporate tax rate is 29%.What is the company’s expected debt-equity ratio?
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A. EBIT 12 Million
B. Income Before Tax:
EBIT 12 Million - interest 2 million = 10 million
C. Income After Tax:
10 million - (29% of 10 million) = 10 million - 2.9 Million = 7.1 million
D. Equity:
(100/8)*7.1 million = 88.75 million
E. Debt-Equity Ratio:
Debt/Equity = debt 25m/88.75 million = 1 : 3.55
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