Pacific Packaging's ROE last year was only 3%; but its management has developed a new operating plan that calls for a debt-to-capital ratio of 55%, which will result in annual interest charges of $470,000. The firm has no plans to use preferred stock and total assets equal total invested capital. Management projects an EBIT of $780,000 on sales of $10,000,000, and it expects to have a total assets turnover ratio of 2.8. Under these conditions, the tax rate will be 35%. If the changes are made, what will be the company's return on equity

12.53%

Explanation:

EBIT = $780,000

Interest = $470,000

EBT = EBIT - Interest

= $780,000 - $470,000

= $310,000

Net Income = EBT - Tax

= $310,000 - (35% × $310,000)

= $310,000 - (0.35 × $310,000)

= $310,000 - $108,500

= $201,500

Total assets turnover ratio = 2.8

Total assets = $10,000,000/2.8

= 3,571,429

Debt ratio = 55% = 0.55

Debt/Total asset = 0.55

Debt/3,571,429 = 0.55

Debt = 0.55 × 3571429

= 1,964,286.4

Equity = 0.45 × 3571429

= $1607143.5

Return on equity = Net income/Equity

= $201,500/$1,607,143.5

= 0.1253

= 12.53%

The company's return on equity will be 12.53%.

forbearance of student loan payments. under forbearance, your loan payments are postponed (or reduced) but interest continues to accrue during the period of forbearance. if you don't pay the interest during that period, the interest may be “capitalized,” which means it is added to your principal balance.