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An investor is considering starting a new business. The company would require $475,000 of assets, and it would be financed entirely with common stock. The investor will go forward only if she thinks the firm can provide a 13.5% return on the invested capital, which means that the firm must have an ROE of 13.5%. How much net income must be expected to warrant starting the business?

Respuesta :

Answer:

$64,125

Explanation:

The return on equity is net income divided by equity (13.5% = net income/$475,000). Net income then equals $475,000 multiplied by 13.5 divided by 100 [(475,000*13.5)/100], which equals $64,125. If given equity for the beginning and end of year, return on equity will be net income divided by average equity (where average equity is the addition of equity at the beginning of the year and equity at year end, divided by 2)

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