Respuesta :
Answer:
16.8%
Explanation:
The computation of the rate of return on equity for HL is shown below:-
Return on Equity = Net income ÷ Total equity
Computation of the total debt and equity for HL firm using debt ratio
For HL:
Debt ratio = Total debt ÷ Total assets
0.50 = Total debt ÷ $20,000,000
Total debt = $10,000,000
Total equity = Total assets - Total debt
$20,000,000 - $10,000,000
= $10,000,000
Interest expense = 12% on debt
= 12% × $10,000,000
= $1,200,000
Calculate the net income for HL firm:-
Earning before interest and tax $4,000,000
Less: Interest expense $1,200,000
Earning before tax $2,800,000
Less: Taxes at 40% $1,120,000
Net income $1,680,000
Substitute the values in ROE formula for HL firm:
Return on Equity = Net income ÷ Total equity
$1,680,000 ÷ $10,000,000
= 0.168
or 16.8%
