Answer:
The ROE is 31.2%
Explanation:
Revenues = 5,000 x $30 = $150,000
EBT (Earnings before tax) is 20% of Revenues, taxes at 35%.
EBT = $150,000 x 20% = $30,000
Earnings after tax = EBT - Tax = EBT - EBT x Tax rate = EBT x (1-Tax rate) = $30,000 x (1-35%) = $19,500
Debt-to-Equity Ratio = Total debt (or liabilities)/Total equity
Total equity = Total debt/Debt-to-Equity Ratio = $25,000/0.40 = $62,500
ROE = Net income/Total equity = Earnings after tax/Total equity = $19,500/$62,500 = 31.2%
