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%
B) 30.00%
C) 33.33%
D) 50.00%

Question

Quizplus · Accepted Answer

The times interest earned ratio is calculated as EBIT/Interest Expense. With a ratio of 2 and interest expense of $1.5 million, EBIT is $3 million. After interest, EBT is $1.5 million. Subtracting the tax liability of $1 million, net income is $0.5 million. ROE is Net Income/Equity, so $0.5 million/$1.5 million = 33.33%.

What Is the ROE for a Firm with Times Interest