 # FSA Practice - ROE

Use the following information to find ROE: -EBIT/sales = 10% -Tax Retention Rate = 60% -Sales/Assets = 1.8 -Current Ratio = 2 -Interest/Assets = 2% -Assets/Equity = 1.9 A. 10.5% B. 11.32% C. 12.16% D. 18.24%

I remember there was an error in this problem…

I think so because I cannot find the solution you have 4 out of the 5 for the 5 part dupont, have no idea how to cal the missin variable though

D) Ok this took me a while and its definitely a skip question. Maybe someone else has an easier way? You want to solve for the missing Interest Burden which you can solve but its not easy. The Interest Burden is EBT/EBIT Using some of the variables we know we can find the interest coverage ratio which is EBIT/Int. With algebra we know that EBIT/Sales * Sales/Assets * Assets/Int all equals EBIT/Int Solving this we get 10% * 1.8 * (1/(.02)) = 9 -> The interest coverage. Know that we know this we can get the Interest Burden. EBIT - Int = EBT and EBIT/Int = 9 so lets say EBIT is \$90 which makes Int \$10 and EBT \$80. \$80/\$90 is the interest burden of 0.88888. Putting it all together we get ROE = .1 * .6 * .8888 * 1.8 * 1.9 = ~18.24%

I just ran into 3 variations of this question. here’s what they give: (EBIT/Sales)(Sales/Assets) - (Interest/Assets)(Tax Retention Rate) so i guess this says: (operating profit margin)(Assets Turnover) - Interest Expense Rate(Tax Burden) the only way it makes sense to me is: [(EBIT/Sales)(Sales/Assets) - (Interest/Assets)] = EBT/Assets which makes everything else cancel out (EBT/Assets)(Assets/Equity)(NI/EBT) Answer is D.

Whoa thanks Viper.

NI / CE = (EBIT - Int) (1-T) / CE = (EBIT - Int) / TA * TA / CE * (1-T) = (Ebit/TA - Int / TA) * TA / CE * (1-T) = [EBIT / Sales * Sales / TA - Int / TA] * TA/CE * (1-T) = (.1 * 1.8 - .02) * 1.9 * .6 = .16 * 1.9 * .6 = .1824 == D Use the following information to find ROE: -EBIT/sales = 10% -Tax Retention Rate = 60% -Sales/Assets = 1.8 -Current Ratio = 2 -Interest/Assets = 2% -Assets/Equity = 1.9 A. 10.5% B. 11.32% C. 12.16% D. 18.24%

that’s awesome thanks